Bb0016 Book

Small Business Management
Unit 1
Unit 1
Structure
1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9
Small Enterprises: An Introductory Framework
Small Enterprises: An Introductory Framework Definition Types of Small-Scale Industries Characteristics Relationship between Small and Large Units Rationale Objectives Scope Opportunities for an Entrepreneurial Career Role of Small Enterprises in Economic Development
1.10 Problems of Small Scale Industries
Learning Objectives
This unit is the introductory framework to small scale units. After a definition, it highlights the merits associated with such industries and compares it with large scale enterprises. This unit also throw light on problems faced by entrepreneur in starting and working with small scale enterprise.
1.0 Small Enterprises: An Introductory Framework

In a way, small and large-scale enterprises are two legs of industrialization process of a country. Hence, small-scale enterprises are found in existence in every country. Small-scale enterprises have been given am important place in the framework of Indian planning since beginning both for economic and ideological reasons. Today, India operates the largest and oldest programmes for the development of small-scale enterprises in any developing country. As a matter of fact, small sector has now emerged as a dynamic and vibrant sector for
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the Indian economy in the recent years. Before we discuss various aspects of small enterprises development, it seems pertinent to begin with an introductory framework of small enterprises in India.
1.1 Definition
In fact, small-scale industry comprises of a variety of undertakings. The definition of small-scale industry (SSI) varies from one country to another and from one time to another in the same country depending upon the pattern and stage of development, Government policy and administrative set up of the particular country. As a result, there are at least 50 different definitions of SSIs found and used in 75 countries. All these definitions either relate to capital or employment or both or any other criteria. We trace here the evolution of the legal concept of small-scale industry in India. The Fiscal Commission, 1950, for the first time, defined a small-scale industry as one, which is operated mainly with hired labour usually 10 to 50 hands. In order to promote small-scale industries in the country, the Government of India set up the Central Small-Scale Industries Organisation and the Small-Scale Industries Board in 1954-55. The SSI Board at its first meeting held on January 5th and 6th, 1955 defined small-scale industry as a unit employing less than 50 employees, if using power, and less than 100 employees without the use of power and with a capital asset not exceeding Rs. 5 lakhs. As per the Abid Hussain Committees recommendations on small-scale industries, the Government of India has, in March 1997, further raised investment ceiling to Rs. 3 crores for small-scale industries and to Rs. 50 lakhs for tiny units. The New Policy Initiatives in 1999 2000 for the small-scale sector has reduced the investment limit for small-scale and ancillary undertakings from existing Rs. 3 crores to Rs.1 crore.
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An ancillary unit is one, which sells not less than 50% of its products to one or more industrial units. For small-scale industries, the Planning Commission of India uses terms village and small-scale industries. These include modern small-scale industry and the traditional cottage and house hold industries. This is depicted in the following chart:
Small Scale Industry
Modern Small Scale Industry
Cottage Industry
Village Industry
Ancillary Industry
1.2 Types of Small-Scale Industries

Small-scale industries can be classified into 5 main types as follows: 1) Manufacturing industries, i.e., industries producing complete articles for direct consumption and also processing industries. 2) Feeder industries specializing in certain types of products & services, e.g. casting, electro-plating, welding, etc. 3) Serving industries covering light, repair, shops necessary to maintain mechanical equipment;
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4) Ancillary to large industries, producing parts and components and rendering services; and 5) Mining or quarrying.
1.3 Characteristics
Small-scale industry is beautiful because of its following important characteristics: 1) A small-scale unit is generally a one-man show. Even the small units, which are run by a partnership firm or company, the activities are mainly carried out by one of the partners or directors. In practice, the other is simple as sleeping partners or directors who mainly assist in providing funds. 2) In case of small-scale industries, the owner himself/herself is a manager also. Thus, these units are managed in a personalized fashion. The owner has first hand knowledge of what is actually going on in the business. He takes effective participation in all matters of business decision taking. 3) Compared to large units, a small-scale industrial unit has a lesser gestation period, i.e. the period after which the return on investment starts. 4) The scope of operation of small industrial undertaking is generally localized catering to the local and regional demands. 5) Small units use indigenous resources and, therefore, can be located anywhere subject to the availability of these resources like raw materials, labour etc. 6) Small industries are fairly labour intensive with comparatively smaller capital investment than the larger units. According to P. C. Mahalanobis, small-scale units require very little capital. About six or seven hundred rupees small-scale would get an artisan family started. With any given investment, employment possibilities would be ten or fifteen or even twenty times greater in comparison with corresponding factory system.
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7) Using local resources, small units are decentralized and dispersed to rural areas. Thus, the development of small-scale industries in rural areas promotes more balanced regional development, on the one hand, and prevents the influx of job seekers from rural areas to cities and urbanizing centers, on the other. 8) Compared to large-scale units, small-scale units are more change susceptible and highly reactive to socio-economic conditions. They are more flexible to adapt changes like introduction of new products, new method of production, new materials and new markets, new forms of organisation, etc.
1.4 Relationship between Small and Large Units

Going through the distinct characteristic of small-scale industries, one should not assume that the both small and large are antithetic to each other. In other words, the both cannot sustain in an economy. It is, in fact, true the other way round, and to a great extent, one is often ancillary or complementary to the other. The relationship between the small and the large industrial units can be seen in various respects. Yet, the following are the important ones: 1. Competitive: Small-scale industry cannot compete with large industry in certain circumstances and in selected products. Examples of such industries are bricks and tiles, fresh baked goods and perishable edibles, preserved fruits, goods requiring small engineering skill, items demanding craftsmanship and artistry. 2. Supplementary: Small industries can fill in the gaps between large-scale production and standard outputs caused by large-scale units. This is due to this supplementary role of small units. 3. Complementary: Apart from supplementary relationship, small industry has been a complementary to its large counterparts. In the real world, many small units produce intermediate products for large units. Such subcontracting
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relationship between the small and large was particularly marked in the economic history of todays industrially developed Japan. As industrialization proceeds, small firms seem naturally to shift from activities that compete with large firms to complementary ones. 4. Initiative: Attracted by the high profits of large units, small units can also take initiative to produce the particular product. If succeeds, the small unit grows too large over a period of time. Staley quotes such initiation that many of the automobile factories started this way in the United States of America. In our country too, the electronic industry looks like following to this initiative pattern of development. 5. Servicing: Small industries do also install servicing and repairing shops for the products of large units. In the case of India, such small servicing units can be seen proliferating in respect of large industries like refrigerators, radio and television sets, watches and clocks, cycles and motor vehicles.
1.5 Rationale
Having discussed the distinct characteristics of small-scale industry as also its relationship with large-scale units, the rationale of small-scale industry development in India is to be understood. Emphasizing the very rationale of small-scale industry in the Indian economy, the Industrial Policy Resolution (IPR), 1956 stated: They provide immediate large-scale employment, they offer a method of ensuring a more equitable distribution of the national income and they facilitate an effective mobilization of resources of capital and skill which might otherwise remain unutilized. Some of the problems that unplanned urbanization tends to create will be avoided by the establishment of small centers of industries of industrial production all over the country.
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The rationale of small-scale industries so established can broadly be classified into four arguments, viz., (1) Employment argument (2) Equality argument (3) Decentralization argument and (4) Latent resources argument. 1. Employment Argument In view of Indias scarce capital resources and abundant labour, the most important argument advanced in favour of the SSIs that they have a potential to create immediate large-scale employment opportunities. The increasing emphasis on SSIs in developing countries like India stems largely from the widespread concern over unemployment in the country. There are many research findings available, which, well establish that small-scale units are more labour intensive than large units. In other words, small units use more of labour per unit of output than investment. According to a study, while the output-employment ratio is the lowest in the small-scale sector, employment-generating capacity of small sector is eight times that of the large-scale sector. There are some scholars like Dhar and Lydall who oppose to this employment argument of small-scale industries. They hold the view that employment should not be created for the sake of employment. The important problem, according to them, is not how to absorb surplus resources, but how to make the best use of scarce resources. Then, the employment-argument becomes an output argument. 2. Equality Argument One of the main arguments put forward in favour of the small-scale industries is that they ensure a more equitable distribution of national income and wealth. This is accomplished because of the two major considerations:
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(i)
Compared to the ownership of large-scale units, the ownership pattern in S.S.I. is more widespread.
(ii)
Their more labour-intensive nature, on the one hand, and their decentralization and dispersal to rural and backward areas, on the other, provide more employment opportunities to the unemployed. This results in more equitable distribution of the produce of the small-scale units. It is also held that most of the small enterprises are proprietary or partnership concerns, the relations between the workers and the employers are more harmonious in small enterprises than in the large enterprises.
In India wages in small industries are about half the wages paid in large industries. The reason is not difficult to seek. Workers in small enterprises, due to virtual non-existence of trade unions, are unorganized and easily exploited by the employers. But in an under-developed country like India, The workers have choice not between a high paid job and a low paid job but between a low paid job and no job at all. Then, even if small scale units provide low paid jobs, they would be of virtual importance in an economy like ours where millions are already in search of employment to earn their livelihood. 3. Decentralization Argument Decentralization argument impresses the necessity of regional dispersal of industries to promote balanced regional development in the country. Big industries are concentrated everywhere in urban areas. But, small industries can be located in rural and semi - urban areas to use local resources and to cater to the local demands. Admittedly, it will not be possible to start small enterprises in every village, but it is quite possible to start small enterprises in a group of villages. The International Perspective Planning Team also rightly stressed that the focus for industrial development under the dispersal policy should be neither
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the metropolis nor the village, but rather the large range of potentially attractive cities and towns between these two extremes. Decentralization of industrial enterprises will help tap local resource such as raw materials, idle savings, and local talents and ultimately improves the standard of living even in erstwhile backward areas. The most glaring example of this phenomenon is the economy of Punjab, which has most small-scale units that even the industrially developed state of Maharashtra. 4. Latent Resources Argument This argument suggest that small enterprises are capable of mopping up latent and unutilized like hoarded wealth and ideal entrepreneurial ability, etc. however, the real force of latent resources argument lies in the existence of entrepreneurial skill. There is no evidence of an overall shortage of small entrepreneurs in India. The emergence of entrepreneurial class requires a conductive environment. The fact remains that small enterprises provides such environment in which the latent talents of entrepreneurs find self-expressions. Our economic history bears this evidence. The impressive growth in the number of small enterprises in the postindependence period highlights the same fact that providing the necessary conditions such as power and credit facilities, the latent resources of entrepreneurship can be tap by the growth of small enterprises only.
1.6 Objectives
The various objectives of developing small-scale industries are, infact, implied in one way or other, in its rationale itself, just discussed in the preceding section. Nonetheless, an attempt has been made in this section to list the main objectives of developing small enterprises in India in a more orderly manner. These are: 1) To generate immediate and large scale employment opportunities with relatively low investment. 2) To eradicate unemployment problem from the country.
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3) To encourage dispersal of industries to all over country covering small towns, villages and economically lagging regions. 4) To bring backward areas too in the mainstream of national development. 5) To promote balanced regional development in the whole country. 6) To ensure more equitable distribution of national income. 7) To encourage effective mobilization of countrys untapped resources. 8) To improve the level of living of people in the country.
1.7 Scope
In fact, the scope for small-scale industries is quit vast covering a wide range of activities requiring less sophisticated technology. In consonance with its distinct characteristics, the activities, which are found particularly amenable to and can be successfully operated in small-scale are too many to mention. Among them, the important ones are: Manufacturing activities Servicing/repairing activities Retailing activities Financial activities Whole-sale business Construction activities Infrastructural activities like transportation, communication and other public utilities. In order to strengthen the scope for small industry development in the country, the government of India has, along with its other assistance programmes, announced its reservation policy for small sector in the country. The reservation policy was initiated in 1967 when only 47 items were reserved for exclusive manufacture in the small-scale sector. By 1983, the reserve list included 836 items for exclusive production in the small-scale sector. Recently, the Abid
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Hussain Committee Reserves 12 items and thus, they are still 824 items reserved for exclusive production in small sector. The main objective of the reservation policy has been to insulate the small sector from unequal competition of large industrial establishments, so that the sector can grow through expansion of existing units and the entry of new firms. The important industries reserved for exclusive development in the small sector are: Food and Allied Industry; Textile Products; Leather and Leather Products, including Footwears; Rubber Products; Chemical and Chemical Products; Natural Essential Oils; Organic Chemicals and Chemical Products; Glass and Ceramics; Mechanical Engineering Transport Equipment; Metal Cabinets of all types; Pressure Stove; Electrical Appliances; Electronic Equipments; and Components; Ports and Trucks Body Building; Auto Parts Components; Ancillary and Garage Equipments; Bicycle Parts, Tricycles and Perambulators;
Miscellaneous Transport equipments; Mathematical and Survey Instruments; Sports Goods; Stationary Items, Clocks and Watches, etc. Here, it seems pertinent to mention that the performance of reserved small industries does not out shine that of non-reserved small industries. Infact, the noble intention of the reservation policy has been to insulate that small sector for unequal competition of powerful large-scale industrial units, so the small sector can go through expansion of existing units, on the one hand, and by the entry of new firms, on the other. Examples are galore to support the view.
1.8 Opportunities for an Entrepreneurial Career

It is known that, by connotation, small-scale enterprises mean the enterprises with less capital investment and more labour absorption, less technologyoriented, using local resources, catering to local/regional demands so on and so forth. Small enterprises are commonly known for, what is called, one man show in which the same person performs various roles simultaneously as an owner, a
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capitalist, an organizer, a manager, a laborer and what not. We know that a person who organizes, manages and takes risks involved in running a business or enterprise is commonly called an entrepreneur. This means there are as many entrepreneurs as are small enterprises. The Government of India has given small enterprise an important place in the framework of Indian economic planning for ideological as well as economic reasons. As a result, small-scale sector has achieved an impressive growth in the number of units, for example over the period. The number of small-scale enterprises has increased from 2.96 lakhs in 1977-78 to 25.71 lakhs in 1994-95. In common sense, increasing number of small enterprises means increasing number of persons assuming the entrepreneurial career. In pursuant of the Government of Indias new small-scale enterprise policy titled Policy Measures for Promoting and Strengthening Small, Tiny, and Village Enterprises tabled in the Parliament on 6th August 1991 and later passed, the small sector is sure to develop and expand in coming years also. It infers to inter alia more chances for enterprising persons to assume the entrepreneurial career in the future. Thus, small-scale enterprises serve as seedbed for the emergence of entrepreneurship in the country. To conclude, more the small enterprise development, more will be opportunities for entrepreneurial career and vice versa. The Indian Punjab is a clearest example how opportunities for entrepreneurial career commensurate with the increasing number of small enterprises in the state.
1.9 Role of Small Enterprises in Economic Development

The commonest definition for economic development could be an increase in real per capita income of a person resulting in improvement in the levels of living. The development of small-scale industries contributes to the increase in per capita income, i.e., economic development in various ways. It generates
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immediate employment opportunities with relatively low capital/investment, promotes more equitable distribution of national income, makes effective mobilization of untapped capital and human skills and leads to dispersal of manufacturing activities all over the country, leading to growth of villages, small towns and economically lagging regions. This promotes to balanced regional development. Any discussion on the role of small enterprises in economic development of a country will much better be facilitated if we examine it with relevant parameters. Of course, increase in the number, production, employment and exports of smallscale enterprises over a period of time could be common parameters to adjudge the role played by small enterprises in the country. The small industries have registered phenomenal growth in their number, production, employment and exports over the years. Their number have phenomenally grown from 16,000 in 1950 to 31.21 lakhs in 1998-99. While production has registered an increase of more than twenty times, employment grew by about three times over the period 1974-99. Growth in exports has been particularly commendable from mere Rs. 393 crores in 1973-74 to a mounting high figure of Rs. 57,488 crores in 1998-99. One way, the most plausible, way of viewing at the role of small enterprise in economic development is to see its relative position in terms countrys total production, employment and exports. It is encouraging to mention that the small-scale enterprises account for about 35% of the gross value of the output in the manufacturing sector, about 80% of the total industrial employment and about 40% of the total exports of the country. The Government of India has been attaching increasing importance to the development of small-scale industries by way of various support measures adopted from time to time. In view of this, it is hoped that the relative share of small-scale sector in the national cake-production, employment and exports would definitely increase in the years ahead. Thus, its role in the economic
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development of the country would become more and more vital with the passage of time.
1.10 Problems of Small Scale Industries

We have discussed so far the distinguished peculiarities of small-scale industries. We have found that the organizational pattern of these industries places them at a distinct disadvantage vis--vis the large sector. This disadvantage has given rise to various problems with which the small-scale industries have to contend. We discuss them below in some detail. 1. Problem of Raw Material A major problem that the small-scale industries have to contend with is the procurement of raw material. The problem of raw material has assumed the shape of (i) an absolute scarcity, (ii) a poor quality of raw materials, and (iii) a high cost. Earlier, the majority of small-scale units mostly produced items dependent on local raw material. Then, there was no severe problem in obtaining the required raw materials. But, ever since the emergence of modern small-scale industries manufacturing a lot of sophisticated items, the problem of raw material has emerged as serious problem on their production efforts. The small units that use imported raw material face raw material problem with more severity mainly due to difficulty in obtaining this raw material either on account of the foreign exchange crisis or some of other reasons. Even the small units that depend on local resources for raw material requirements face the problem of other type. An example of this type is handloom industry that depends for its requirement of cotton on local traders. These traders often supply their cotton to the weavers on the conditions that they would sell their ready clothes to these traders only. Then, what happens that the traders sell cotton to them at a fairly high prices and, on the contrary, purchase the ready clothes at a very low price? This becomes a clear
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example of how the poor weavers are subjected to double exploitation at the hands of the traders. Keeping in view the raw material problem of small-scale industries, the Government makes provisions for making raw material available to small units. Nonetheless, small units with no special staff to laise with official agencies, these small units are left with inadequate supplies of raw material. As a result, they have to resort to open market purchases at very high prices. This, in turn, increases their cost of production, and, thus, puts them in an adverse position vis--vis their better and larger rivals. 2. Problem of Finance an important problem faced by small-scale industries in the country is that of finance. The problem of finance in small-sector is mainly due to two reasons. Firstly, it is partly due to scarcity of capital in the country as a whole. Secondly, it is partly due to weak creditworthiness of small units in the country. Due to their weak economic base, they find it difficult to take financial assistance from the commercial banks and financial institutions. As, such, they are bound to obtain credit from the money lenders on a very high rate of interest and are, thus, exploitative in character. The positive change in attitude of banks would be clear from the fact that whereas the amount of credit outstanding (of public sector banks) to small-scale industries stood at only Rs. 251 crores in June 1969, it rose to a staggering figure of Rs. 15,505 crores in March 1990. From the above figures it appears that the availability of institutional credit to small-scale industries is certainly increasing. Nevertheless, the fact remains that the criterion of credit worthiness still weighs heavily with the nationalized commercial banks. This would be clear from this fact that of the units assisted by commercial banks up to June 1976, about 69% of the total credit was availed of by 11% of the bigger units in the small-scale sector, which accounted for 55% of the total production. This underlines the need to
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change the outlook of the banks. For this, it is necessary to further liberalize the rules and practices of banking in the country. 3. Problem of Marketing One of the main problems faced by the small-scale units is in the field of marketing. These small units often do not possess any marketing organisation. In consequence, their products compare unfavorably with quality of the products of the large-scale industries. Therefore they suffer from comparative disadvantages vis-a- vis large-scale units. In order to save small units from this competitive disadvantage, the Government has reserved certain items for the small-sector. The list of reserved items has continuously expanded over the period and at present stands at 824 items. Besides, the Trade Fair Authority and State Trading Corporation (STC) help the small-scale industries in obtaining the government orders and locating export markets. Ancillary units face the problems of their own types like delayed payment by the parent unit; inadequacy of technological support extended by parent units, non adherences to quality and delivery schedule, thus, disturbing the programs of the parent unit and absence of a well-defined pricing system and regulatory laws. 4. Problem of Under-utilization of Capacity There are studies that clearly bring out the gross under-utilization of installed capacities in small-scale industries. According to Arun Ghosh, on the basis of All India Census of Small-scale Industries, 1972, the percentage utilization of capacity was only 47 in mechanical engineering industries, 50 in electrical equipment, 58 in automobile ancillary industries, 55 in leather products and only 29 in plastic products. On an average, we can safely say that 50 to 40 % of capacity was not utilized in small-scale units. The very integral to the problems of under-utilization of capacity is power problem faced by small-scale industries. In short, there are two aspects of the
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problem: One, power supply is not available to the small units on the mere asking, and whenever it is available it is rationed out, limited to a few hours in a day. Second, unlike large industries, the small-scale industries cannot afford to go in for alternatives; like installing own thermal units, because these involve heavy costs. Since small units are weak in economic front, they have to manage as best as it can within their available meager means. 5. Other Problems In addition to the problems enumerated above, the smallscale industries have been constrained by a number of other problems also. According to the Seventh Five Year Plan, these include technological obsolescence, inadequate and irregular supply of raw materials, lack of organized market channels, imperfect knowledge of market conditions, unorganized nature of operations, inadequate availability of credit facility, constraint of infrastructure facilities including power etc. and deficient managerial and technical skills. There has been lack of effective co-ordination among the various support organizations set up over the period for the promotion and development of these industries. Quality consciousness has not been generated to the desired level despite various measures taken in this regard. Some of the fiscal policies pursued have resulted in unintended splitting up of these capacities into uneconomic operations and have inhibited their smooth transfer to the medium sector. All these constraints have resulted in a skewed cost structure placing the sector at a disadvantage vis--vis the large industries both in the domestic and the export markets. Exercises: 1) Define a small scale industry. Narrate different problems associated with them. 2) Differentiate between Small Scale, Tiny and Large Scale Industrial establishments. 3) How far the small industrial units contribute to the Economic Development of our country ? Analyse.
Unit 2
Unit 2
Structure
2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9
Establishing a Small Enterprise
Establishing a Small Enterprise The start up Process Project Identification Selection of the Product Project Formulation Assessment of Project Feasibility Market Survey Investment/Risk Analysis Preparation of Project Report Selection of Site (Location)
2.10 Legal Considerations 2.11 Basic start up Problems
Learning Objectives
Different hurdles in the way of starting small enterprises are discussed in this unit with references to different methods of Assessment of the project.
2.0 Establishing a Small Enterprise

Setting up of a new business enterprise is a very challenging and rewarding task. Several problems are involved in this task. Right from the conception of a business idea upto the start of production, numerous decisions have to be taken. In order to succeed in this task, an entrepreneur must correctly perceive the nature and intensity of problems to be faced and prepare and implement appropriate plans.
2.1 The start up Process

An entrepreneur desiring to set up an industry must at the outset become familiar with the economic, political and legal environment in the country. The main components of such environment are as under:
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a) Priorities and policies of the Government b) Assistance and facilities offered by various states c) Various organisations assisting entrepreneurs d) Incentives for starting industry e) Government store purchase programme f) Licensing and registration requirements
g) Policies and regulations concerning imports and exports, excise and sales tax, Factories Act, foreign collaboration, etc. After getting familiar, an entrepreneur should understand the procedure for setting up a small scale unit. The main steps involved in the establishment of a small business venture are as follows: 1) Selection of the product 2) Location of the enterprise 3) Preparation of the project report 4) Choice of form of ownership 5) Registration with the authorities 6) Arranging term finance 7) Statutory Licenses and Clearances 8) Acquiring land and building 9) Arranging Working capital 10) Recruitment of staff 11) Installation of machinery 12) Procuring raw materials 13) Power connection and water supply 14) Starting production 15) Marketing the product
2.2 Project Identification

Project identification is the process of identifying opportunities for new business ventures. This process involves collection, compilation and analysis of relevant
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data for the ultimate purpose of choosing a suitable opportunity for investment. Project identification requires defining the objectives and characteristics of the selected project. Project objectives are concerned with defining it in a precise manner what the project is expected to achieve and to provide a measure of performance for the project as a whole. Project objectives are aimed at completion of the project within the specified time and cost limits. Every project has three basic dimensions- outputs and social costs and benefits. The input characteristics define what the project will consume in terms of raw materials, energy, manpower, finance and organisational set up. The nature and magnitude of each of these inputs must be determined in order to make the inputs clear. The output characteristics of a product define what the project will generate in the form of goods and services, employment, revenue, etc. The quantity and quality of all these outputs should be clearly specified. In addition to inputs and outputs, every project has an impact on the society. It is, therefore, necessary to judge the sacrifice, which the society will be required to make the benefits that will accrue to the society from a given project. There are internal and external constraints in project identification. Internal constraints arise on account of the limitation of management responsible for implementing the project. The main internal constraints are as follows: a) Unrealistic project objectives decided by the top management without the active involvement of project team. b) Lack of project management strategies, sound organisation structure and effective control systems. c) Dependence of the entrepreneur on outside consultants in preparing feasibility reports. d) Shortage of physical (finance, personnel, raw materials, technology, etc.) and non-physical (patents, secret processes, skills and experience, etc.) resources.
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The external constraints in project identification arise from the external environment. Some of the important external constraints are given below: a) Nature, size and location of the project not conforming to the socio-economic objectives of the country. b) Government policies and regulations causing delay in the commissioning of a project. c) Cumbersome documentation and procedures of banks and financial institutions. d) Social taboos and limited size of the market.
2.3 Selection of the Product

Product selection is the first major step in the setting up of business enterprise. Choice of the right product to be produced is the first essential of success in entrepreneurship. Selection of the product should be made very carefully. In order to select the most promising product, it is necessary to generate a few ideas about the possible lines of business. The business ideas may be generated from internal and external sources. Internal Sources of Business Idea: Internal sources refer to the storehouse of knowledge built by a person over the years. These are as follows: a) Analysis of concepts in the light of existing problems and their solutions. b) Search form memory to identify similarities and elements related to the concept c) Recombining the available elements in new and better ways. d) Personal interest and hobbies of the individual e) Thinking of novel uses of existing product e.g. use of rice busk for making hard boards, use of fly ash in making concrete and bricks, etc. f) Conceiving improvements in existing products
g) Examining possibilities of anciliarisation to large scale industry h) Knowledge of the potential customer needs
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External Source of Ideas for New Products: These are as under: a) List of items reserved by the Government for exclusive production in the small sector, b) Items reserved for exclusive purchase from small scale industries under the Central Store Purchase Program of the Government c) Professional journals, trade journals, etc. catering to particular interests such as electronics, components, oils and vanaspati. d) Success stories of friends and relatives e) Trade fairs and exhibitions displaying new products f) Government agencies like SIDO, NSIC, etc.
g) Market surveys to know trends in fashions h) Technical and management consultants i) Project profiles for various industries
Generation of business ideas or opportunities is also known as opportunity scanning and identification (OSI). After generating ideas, it is necessary to evaluate them so as to identify as most appropriate idea/opportunity. This process is called Zeroing in process. Following factors should be considered while selecting the product to be manufactured: a) Market potential b) Degree of competition c) An innovative idea which has greater profit potential than an existing product d) Availability of raw material and technology e) Resources and experience of the entrepreneur in the line f) Government policies and regulation
g) Suitability of the product to market requirement
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2.4 Project Formulation

Project formulation is the systematic development of a project idea for the eventual purpose of arriving at an investment decision. It involves a step by step investigation and development of project idea. It is a process involving the joint efforts of a team of experts. Each member of the project team should be fully familiar with the broad strategy, objectives and other ingredients of the project. A well-formulated project is the best passport for obtaining the required assistance from financial institutions. Project formulation will also be a great help in obtaining necessary clearances from the Government. An entrepreneur can establish his bonafides with the help of a well formulated project as reflected in his project reports. The process of project formulation consists of the following elements: a) Feasibility study b) Techno economic analysis c) Input analysis d) Financial analysis e) Social cost benefit analysis f) Project design and network analysis
g) Project appraisal
2.5 Assessment of Project Feasibility

Before starting any industry, it is very essential to judge the feasibility and profitability of the proposed project. This requires the following types of analysis. 1. Technical Feasibility: It implies the availability or otherwise of plant and machinery and technical know-how to produce the product within the prescribed norms. It consists of the following: a) Identifying the technical specifications of the product in terms of its functional design, adaptability of new customer demand, durability,
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reliability of performance, acceptable level of obsolescence, safety and standardization. b) Finding out availability of necessary inputs e.g. land, raw materials (both quantity and quality), plant and machinery, technical skills, power and water transport and communication facilities, service facilities like machine shop and repair shop, etc. If the technical knowhow is to be obtained from outside, arrangements made should be specified in the project report. Arrangements proposed for training of labour should also be mentioned. If the project requires any foreign collaboration, the terms and conditions thereof should be described. The entrepreneur should check up the legal provisions with reference to collaborations permitted for this type of project: Pollution control measures required for the project should also be specified. c) Preparing an outline of the manufacturing process including flow process charts d) Testing the product through a) engineering studies relating to machines, tools and workflow b) product development through blueprint, models and prototype c) product testing through laboratory and field study 2. Economic Viability: Economic viability of a new venture can be judged by: (a) Identifying the market potential in terms of current demand for the product and projected future demand. It is necessary to identify the specific end users, major market segments and potential purchase volume for each segment. The entrepreneur should use relevant statistical criteria for this purpose. For example, a potential text book publisher may find out the number of students enrolled in the concerned subject, percentage of text book users and the proportion of demand already met. Export demand should also be judged.
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(b) Estimating cost volume profit relationship to judge the potential sales volume and profit volumes at different price levels. Such analysis will help in determining the optimum size of the venture, sales volume required to earn targeted profits, the degree of capacity utilisation, the most appropriate installed capacity, evaluation of product cost, expected revenue and a suitable price structure. (c) Analysing competition both direct (from similar products) and indirect (from substitutes). It is necessary to identify potential competitors, their strengths, their strategies and their impact on the proposed venture. (d) Sources of market information In order to judge the economic viability of project considerable data is required. Such data includes: (1) Data relating to general economic trends such as per capita income, level of consumption, expenditure, inventories new orders, etc. (2) Market data relating to demand pattern, seasonal competitors. (3) Data concerning price structure and discount pattern. Relevant market data can be obtained from secondary sources like government agencies, trade associations, chamber of commerce, trade directories and other publications. Such data is less expensive and less time consuming. But it may not satisfy the specific requirement of the entrepreneur. Data obtained through primary sources such as interviews, mailed questionnaire and market surveys and more appropriate though expensive and time consuming. Market testing and market surveys are two important methods of collecting market data. A market test can provide information about likely sales volume, expected profitability, soundness of selected market strategy, unknown weakness that require attention, etc. However, market test is costly and time consuming and may expose the new venture to competitors prematurely.
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Displaying the product at trade fairs, test marketing to judge the receptivity of the new product and sample sales are the main methods of market testing. 3. Financial Feasibility: It comprises the following aspect: (a) Assessment of total financial requirements Project cost consists of Non recurring and recurring expenses. Non recurring expenses or fixed investment includes land and buildings, plant and machinery, furniture and fixture, etc. The amount of fixed capital will depend on the scale of operations, type of technology, time of investment, etc. While assessing the fixed capital requirements, the cost of assets engineering and architectural fees, installation and electrification charges, pre-operation expenses of trial runs, etc. should be taken into consideration. Working capital or recurring expenses include raw materials, stock of finished goods, wages and salaries, etc. It will depend upon the level of activity, terms of purchase and sale, etc. (b) Determining sources and costs of funds. Once the total funds required are estimated, appropriate sources need to be chosen to raise the required investment. For this purpose the weighted average cost of funds should be calculated. (c) Analysing cash flow: After estimating the amount of funds required and their costs, the anticipated flows of cash from the project are determined. For this purpose, a cash flow statement is prepared. (d) Anticipating Return on Investment No projects financially feasible unless it generates a satisfactory yield on investment. Average earning expected from the project over a specific period of time when divided by investment shows the return. Such return when compared with potential return from alternative investment opportunities will help in deciding the acceptability or otherwise of the project.
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4. Managerial Competence: A proper assessment of the number and skills of staff required for the project is necessary. For this purpose an appropriate organisation structure is decided. Then the skills and talents required to man the structure is determined. The process of preparing an inventory of skills needed for effective implementation of the project consists of the following steps: (i) activity analysis involving anticipated work flow and the activities involved in the project (ii) grouping of activities into tasks which employees can perform effectively (iii) classification of tasks as the building blocks of the organisation structure (iv) determining inter-relationships between different positions to decide the chain of command 5. Implementation Scheme: Lastly, an implementation schedule is prepared to ensure timely completion of the project. Timely completion will help to avoid time and cost overruns. Delays in project completion may jeopardise the financial viability of the project. The project may have to be dropped forever.
2.6 Market Survey

Product selection is followed by market survey. Before the production actually starts, the entrepreneur needs to anticipate the possible market for the product. He has to anticipate who will be the possible customers for the product and where and when his product will be sold. This is because of the fact that the basic purpose of running any business or enterprise is to earn profit and profit is the difference between sales income and business expenses. Production has no value for the producer unless it is sold. In fact, the potential of the market constitutes the determinant of probable rewards from entrepreneurial career. Thus, Knowing the anticipated market for the product to be produced becomes an important element in every business plan. The various methods used to
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anticipate the potential market, what is named in Managerial Economics as demand forecasting. 1. Opinion Polling Method: In this method, the opinions of the ultimate users of the product i.e. the customers is estimated. This may be attempted with the help of either a complete survey of all customers (called, complete enumeration), by selecting a few consuming units out of the relevant population (called, sample survey). Complete Enumeration Survey In this survey, all the probable customers of the product are approached and their probable demand for the product is estimated and then summed. Estimating sales under this method is very simple. It is obtained by simply adding the probable demand of all customers. Though the principal merit of this method is that it obtains the first hand and unbiased information, yet it is beset with some disadvantages also. For example, to approach a large number of customer scattered all over market becomes tedious, costly and cumbersome. Added to this, the consumers themselves may not divulge their purchase plans due to the reasons like their personal as well commercial/business privacies. (a) Sample Survey Under this method, only some number of consumers out of their total population is approached and data on their probable demand for the product during the forecast period are collected and summed. The total demand of sample customers is finally blown up to generate the total demand for the product. No doubt, survey method is less costly and tedious than the complete enumeration method. (b) Sales Experience Method Under this method, a sample market is surveyed before the new product is offered for sale. The result of the
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market surveyed are then projected to the universe in order to anticipate the total demand for the product. Principally the sample market should be the true representative of the national market, which is not always true. Suppose, if Bombay is selected as a sample market, it may not be a representative of a small place, say Nainital simply because the characteristic features of Bombay are altogether different from those of a hill resort Nainital. Again, if we select Agra as a sample market, sales in Agra would be influenced by the size of the floating tourists population through out the year. (c) Vicarious Method Under the vacarious method, the consumers of the product are not approached directly but indirectly through some dealers who have a feel of their customers. The dealer opinions about the customers opinions are elicited. Being based an dealers opinions, the method is bound to suffer from the bias on the part of the dealers. Then, the results derived are likely to be unrealistic. However, these hang ups are not avoidable. 2. Life Cycle Segmentation Analysis: It is well established that every product has its own life span. In practice, a product sells slowly in the beginning. Backed by sales promotion strategies over period, its sales pick up. In due course of time, the peak sale is reached. After that point, the sales begin to decline. After some period, the product dies. This is, in fact a case of natural death. Thus, every product has its own life span. That is why firms go for new product one after another to keep the firm alive. Then product life span/cycle has been classified into five stages: (1) Introduction (2) Growth (3) Maturity (4) Saturation and (5) Decline.
Considering these stages of a product life cycle, the sales at different stages can be anticipated.
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2.7 Investment/Risk Analysis

Production of a new product or diversification both involve investment. More often than not capital would be scarce given the investment opportunities particularly in the case of small-scale enterprises. The basic objective of every investment is to maximise the profit. As stated earlier, since funds are scarce, only a specific investment opportunity can be chosen out of a given set of alternatives. Therefore, the allocation of the scarce funds. i.e. capital needs to be biased towards those investments which show more prospects of profits. In other words, capital should be invested in those opportunities, which could give the maximum return on capital employed proper investment analysis enables the entrepreneur to choose an investment out of a given set of alternatives. As such, the subject also passes under the title of investment decision, or, economic feasibility. Investment analysis primarily deals with the interpretation of the data incorporated in the proforma financial statements of a project and the presentation of data in a form in which it can be utilised for a comparative appraisal of the project, The technique of ratio analysis and capital budgeting have been used as the most important tools of investment analysis. Break-Even Analysis Let us first address to why break-even analysis ? While discussing preparation of a project report or feasibility report we stated that the level of estimated capacity utilization i.e. quantum of production in terms of goods or service as the case may be, needs to be spelled out in advance in the project report. When the enterprise/business is actually started, in other words, project is actually implemented, the project or targeted level of capacity is not achieved due to various unforeseen reasons. Such situation entails financial implications. Then, the entrepreneur needs to decide to what extent the curtailment in production can afforded to meet all its
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liabilities. In simple words, it is an analysis of production point at which profit starts. This point is where income and expenses are exactly equal and the point is called break- even point. Thus, break-even analysis is used to find the breakeven point. In carrying out any enterprise, profit comes from sale of goods or services as the case may be and expenses emerge out from the cost involved. Expenses to be incurred refer to cost. Cost is broadly divided into two types namely Fixed cost and Variable cost. Fixed Cost: Fixed costs are defined as those that do not change with increase or decrease in production. No matter what the production is, fixed cost remains the same. Example of fixed costs could be the monthly rent paid for the factory, interest on long terms Loan, administrative expenses, etc., Even if there is zero production, the fixed cost will remain unchanged. Variable Cost: In short, what is not fixed cost is variable cost. Variable cost is defined as expenses that change with the volume of production. It varies proportionately with changes in production. Thus, if production is zero, variable cost would be zero. The absolute total variable cost increases or decreases along with increase or decrease in production. But the variable cost per unit is constant at any level of production. There are some variable costs that do not vary proportionately with the change in the production. In fact, these vary in varying degrees. As a result such costs are called semi-variable. The popular example of such costs could be telephone, electricity and gas charges if they are billed on a usage basis. In such cases that proportion of expenses which continue even if production falls are considered as fixed and expenses which increase or decrease as production increases or decreases are considered as variable cost. After knowing sales and total cost in terms of fixed cost and variable cost now the break-even point can be calculated,
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According to the simplest method, Profit is the excess of sales over cost, i.e. Sales Cost = Profit. The calculation of break-even point involves four steps. These are: 1. Segregation of fixed and variable costs 2. Percentage of variable costs to sales 3. Calculate the contribution or margin, i.e., the difference between 100 and the percentage of variable cost to sales as worked out above.
2.8 Preparation of Project Report

Need for a Project Report: A Project Report is a blue print giving the complete framework and structure of the venture that is taken for implementation. When an entrepreneur takes up the task of setting up an industry he has to take the help of and interact with other agencies as well. For example he has to get his unit registered to avail of the facilities he can get from the government and the other industry related governmental agencies. At the time of obtaining the registration the application for registration has to be accompanied by the project report. The entrepreneur has also to obtain finance from the banks and financial institutions. A bank will never lend to an individual or an industry unless it makes sure of the credit worthiness of the borrower, like technical and economic feasibility of the venture and the capacity of the borrower to repay the loan. To get a first hand information of all these requirements the banks also insist on getting a copy of the project report for its own scrutiny. The project report also serves as a guide to the entrepreneur and enables him to proceed step in implementing the project. It also stops him from side tracking and deviating from the project plan and leads him to the right destination.
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How to prepare a Project Report: The entrepreneur should know how to prepare the project report so that he knows well what it contains. If the work of preparing the project report is given to a consultant then the promoter should give the basic idea, the objective and the promoter of the project should give all the guidelines to him. The entrepreneur should be in a position to discuss and present each and every aspect in the report convincingly and with authority whenever such a need arises. What should a Project Report Contain ? 1. General Information and Introduction: This should include the reason and justification for setting up the project, the product to be manufactured or the services to be offered and the goals and objectives to be achieved. 2. Organisational Structure: How is the industry constituted ? It is a proprietorship, a partnership, a company or a co-operative ? Relevant documents like the partnership deed in the case of a partnership, the memorandum of association in case of a company or the by laws in the case of a co-operative should accompany the project report. 3. Promoters: An introduction of the promoter along with his educational background, experience, technical and managerial competence should be given. If there is a key person hired in implementing the project or if there is an involvement of the state or governmental agencies in the project, the same should be given in detail. 4. Location: The site to locate the plant, the reason for selecting the site, in the context of the infrastructural facilities available and waste disposal arrangements to be stated. 5. Land and Building: Land area available, building area, estimated cost and building plan to be provided. If the building is taken on rent a lease deed copy to be enclosed.
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6. Product Details: This contains information of the product, its uses, estimated production, special features of the product, like quality and durability and estimated price. 7. Plant and Machinery: List of machinery and equipment to be installed along with capacity details, guarantee period, manufactures name, brand and model details, price, taxes, transportation and installation charges along with a proforma invoice should be given. 8. Production Process: A format of the production process and layout, a process flow chart, technology and techniques adopted, preparedness for technology ungradation and scope for innovation to be furnished. 9. Raw Material: Details of raw material requirement with sources of supply, availability, quality standards, price, provision to store the raw material and the quantity of material needed at a time to be given. If the material is to be allotted by the MMTC, STC, DIC, or other agencies, such particulars should be furnished. 10. Manpower: A plan showing the human resources needed detailing the requirement of skilled, semi skilled and unskilled workers, managerial, production, sales and other personnel needed should also be given. 11. Power and Water: This should give the requirement of electricity, water, diesel, kerosene and other fuels needed for daily operational use in the plant for the next 10 years. 12. Utilities: Requirements relating to utilities like electricity, diesel, kerosene, water and compressed air for 10 years along with its availability should be mentioned, on a yearly basis. 13. Production Programme: Production turnover and out put on a weekly, monthly and yearly basis upto 10 years must be stated. The input output ratio should be given and any national and international standards set for
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quality assurance with respect for the production programme should be indicated. 14. Market: A detailed report has to be given relating to the following: market survey results and use of the product, substitutes available, major buyers, channels of distribution, market strategy to be adopted, trade practices adopted by the competitors, area and regions where the product would be marketed and so on. 15. Miscellaneous Assets: The nature of the miscellaneous assets that form part of the project like air conditioners, office automation systems and related assets should be furnished along with the price and source of procurement. 16. Requirement of Capital: A break cost of the project giving the following aspects should be given: 1. Cost of land, Building and Machinery 2. Tools, Fixtures and Dies, Pre-project expenses 3. Furniture and Office Equipment 4. Escalation Cost and 5. Margin Money for Working Capital 17. Source of Finance: Funding pattern to meet the capital expenditure like the promoters capital, funds from financial institutions and banks, subsidies from the state and industry support institutions should be mentioned. 18. Working Capital: Total inventory of raw material, finished products and work in process inventory should be indicated. The working capital should be worked out for each production cycle. The nature of credit facilities available from suppliers of raw material should be stated. A list of working capital requirement containing the following should be given: 1. Raw Material and Component cost 2. Labour and Wages
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3. Maintenance and Repairs 4. Transportation Cost 5. Power and Fuel Cost 6. Production Cost 7. Marketing Costs and 8. Other Establishment Cost 19. Cash Flow Statement: A statement showing cash inflow and cash outflow indicating how much money is coming into the business and how much money is going out of the business should be given. 20. Break-even Analysis: As part of the business plan the quantum of production and output giving the cost break up over periods of time in the form of a Break-even Analysis showing the break-even point should be shown. 21. Project Economics: Project economics containing a complete list of items of expenditure and the sources of revenue by way of sales and miscellaneous income to cover the cost and estimated profit balance should be stated. 22. Profitability Projections: Cost of production and projected profitability over the next 10 years should be worked out and indicated. Implementation: A clear picture and plan of how the project would be put together organised and implemented should be clearly given along with data to substantiate where required.
2.9 Selection of Site (Location)

It is essential for every entrepreneur to choose a suitable location for his venture. An entrepreneur should take into consideration several factors while deciding the location. Some of these factors are given below: a) Nearness to the source of raw materials b) Nearness to the market
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c) Availability of land at cheap rates d) Availability of skilled labour e) Cost of labour (Prevailing wage rates) in the area f) Availability of transport and communication facilities
g) Availability of power, water, waste disposal and other essential services h) Incentives and concessions available in different states i) j) General business climate in the region Climate and environmental factors
k) Availability of Factories sheds in industrial estates.
2.10 Legal Considerations

Setting up of a small-scale industrial unit involves some legal formalities. (a) Registration with Director of Industries: Registration of small-scale industry is not compulsory. However, registration with the State Directorate of Industries or District Industries Centre helps in getting assistance from the Government. The registration of small-sale units is done in two stages viz. (1) provisional registration and (2) permanent registration. In case a small-scale or ancillary unit is a subsidiary of or owned or controlled by any other undertaking, it is subject to the normal licensing provisions under the Industries (Development and Regulation) Act, 1951. Normally, a provisional registration is made before the unit is set up and a permanent registration is given when the unit goes into production. (b) Provisional Registration: Provisional registration is possible even when one is planning to set up the unit. For registration an application in the prescribed form has to be submitted. The issue of a provisional certificate is automatic and given within a week unless the proposed industry is one which needs raw materials which government has declared nonavailable to new units because of their scarcity. The provisional registration is valid for one year in the first
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instance. It may be reviewed for a further period of two years in four 6 monthly extensions on submission of satisfactory proof that the entrepreneur has taken active steps to establish the new unit and needs more time. Application for extension should be made within time, otherwise registration automatically lapses. The application for registration of a small-scale unit should be submitted to the General Manager, District Industries Centre located in the district where the unit is to be set up. The following documents are required for provisional registration. (a) Application in the prescribed form duly filled and signed by the proprietor, partners, directors as the case may be. (b) The passport size photos of the proprietors/partners/directors as the case may be. (c) Photocopy of ration card of proprietor, partners/directors who have signed the application. (d) Photocopy of the partnership deed if the unit is a partnership firm. (e) In case the applying unit is a company, photocopy of the memorandum and articles of association, and the certificate of incorporation. The provisional registration will enable the small-scale unit to: (i) Apply for a shed in an industrial estate/developed site in an industrial area and material for construction of a shed as the case may be. (ii) Apply to the Corporation/Municipal/Panchayat/other local authorities for permission to construct the shed to establish a unit. (iii) (iv) Apply for power and water connections. Apply for financial assistance to SFC/nationalised banks/other financial institutions on the basis of a project report as may be required by them (v) Apply to the NSIC/SSIC/other institutions for procuring machinery on hire purchase basis.
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(vi)
Make firm arrangements for working capital resources with banks and other institutions.
(vii) (viii) (ix)
Obtain sales tax, excise duties, etc. registrations where ever required, Take other steps that may be necessary to establish the industrial unit. Apply for import of raw materials (essentiality certificate could be issued on the basis of provisional registration if the Directorate of Industries is satisfied that the entrepreneur for the establishment of the unit has taken effective steps). Subsequent licences will, however, be issued only after the final registration.
(c) Municipal license: The next step is to obtain the municipal license. For example in Delhi it is necessary to obtain from the Municipal Corporation of Delhi (MCD). Registration with Central and State Sales Tax Department would also be necessary for which the concerned department will have to be contacted. An entrepreneur has to submit periodical returns to these departments. If the small-scale unit comes within the purview of the Factories Act. E.g. employs 10 persons with power or 20 without power, registration with the Inspector of Factories will also be required. Otherwise the unit has to be registered under the Shops and Establishment Act, wherever applicable. (d) Permanent Registration: Provisional registration is the means to enable the entrepreneur to take the necessary steps to bring the unit into existence. When the entrepreneur has taken all steps to establish the unit i.e. the factory building is ready, power connection is obtained, the machinery and pollution control equipment have been installed, and license from municipal corporations/other local authority is obtained, one can apply for permanent registration. The application for permanent registration should be made in the prescribed form. Along with the application, the following documents need to be submitted.
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(a) Rent receipt or NOC from landlord or photocopy of the house tax receipt in the name of the small-scale unit. (b) Photocopy of the Municipal License, wherever applicable (c) If power is not in the name of the unit, then NOC from the connection holder along with the proof of the quantum of power installed in home of the connection holder and power consumption bill (d) Photocopy of sale bill of each item (e) Photocopy of purchase invoice of machinery (f) Photocopy of purchase invoice of raw material (g) Photocopy of partnership deed if the unit is a partnership (h) Photocopy of memorandum of association, and certificate of
incorporation, if the unit is a company (i) Photocopy of approved scheme and project report if the unit is assembling/manufacturing (j) An affidavit in the prescribed proforma duly attested by Notary Public Cancellation of Registration: Registration of a small-scale unit can be cancelled (after a show cause notice) on the following grounds: (1) The unit remains closed continuously for more than one year. (2) The unit fails/refuses/avoids to give full and true information required by the registering authority from time to time. (3) The unit has misutilized the raw materials allocated to it An appeal can however be made against cancellation of registration (e) Registration with DGS&D/NSIC: A small-scale unit can get itself registered with Director General of Suppliers and Disposal (DGS&D) or National Small Industries Corporation (NSIC) if it wants to avail of the benefit of purchases made for Government offices. For this purpose, the application should be made in the prescribed form along with the following documents.
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(a) Copies of balance sheet and profit and loss account for the last three years (b) Income tax clearance certificate (c) Ownership document in respect of the firms factory and machinery (d) Certificate in Form A in case of a partnership concern (e) Copies of Memorandum and Articles of Association in case of a company.
2.11 Basic Start up Problems

The main problem involved in the establishment of a small-scale enterprise are given below: (1) Selection of the Industry: Once a person has decided to start his own business, the first major problem is to select the line of business. This problem can be solved by analysing the persons aptitudes, propensity to take risk, organisational ability, skills and experience, family background, financial position, Government policy and incentives, infrastructure facilities, advice of consultants, etc. (2) Product Selection: Another start up problem is the choice of the particular product to be manufactured. This can be decided through a comparative analysis of a few product items with special reference to: (a) Size and structure of the market (b) Future demand pattern (c) Competitive position (d) Life cycle of the product (e) Availability of raw materials (f) Technical aspects of production (g) Availability of required labour (h) Government policy and controls
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(3)
Choice of Factory Site: The next main problem is to find out a suitable location for the factory. Choice of site has already been described under Section 2.9.
(4)
Form of Organisation: The proprietor has to select an appropriate form of business organisation for his unit.
(5)
Problem of Construction: Construction of factory building involves several problems e.g., (a) Acquisition of land in the chosen locality (b) Architectural design of the building (c) Appointment of engineers and contractors
(d) Civil work like obtaining power and water connection (e) Supervision of construction work (f) Acquisition and installation of machinery and equipment
(6) Supply of Raw Materials: Appropriate suppliers of raw materials have to be selected. Agreements, need to be made with the concerned suppliers. (7) Financing the Unit: The funds required for both fixed capital and working capital have to be estimated. Appropriate sources of required funds have to be decided Arrangements are then made to collect the necessary finance. (8) Recruitment and Training of staff: Staffing of the new unit is another major problem. First of all, the quantity and quality of staff required are judged. Then people with required skills are selected. Necessary training arrangements are made for preparing the selected people to handle their jobs efficiently. (9) Trail Run: Production is then started on an experimental basis. The difficulties and constraints experienced during the trial run are tackled before starting commercial production.
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(10) Marketing: Through necessary prospecting, markets for the product are decided. Test marketing is done to judge the acceptability of the product. The experience gained through test marketing is used to make necessary improvement in the product. After that the product is launched in the market. (11) Great care and efforts are required to successfully overcome the problems and risks during the gestation period. Effective control over expenses, time and cost overruns, sales pattern, etc. are necessary to ensure that the unit survives the initial expenses and losses. Once the unit starts generating profits the start up problems are by and large over.
Exercises: 1) What do you mean by a project work ? How is it prepared ? 2) How to find an ideal location ? Explain the factors influencing location. 3) What is feasibility study ? How it is conducted ?
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Unit 3
Structure
3.0 3.1 3.2 3.3 3.4 3.5 Ownership Structure Proprietorship Partnership Joint Stock Company Co-operative
Ownership Structure
Selection of an appropriate form of Ownership Structure
Learning Objectives
Decision about the type of ownership for the proposed small industrial unit is discussed here. Sole trading, Partnership, Joint Stock Companies and Co-operative Societies are mentioned with its relative advantages and disadvantages and critical observations/key points for selection of right type of ownership is also highlighted.
3.0 Ownership Structure

We have so far discussed on product selection and product planning. Integral to these is the decision to choose upon the legal form of enterprise within the framework of which the entrepreneur plans to operate his/her enterprise. Legal form of an enterprise is necessary for various reasons. As and when the entrepreneur wishes to raise a loan, a banker, a financial institution and even a private moneylender like to know the ownership form of the enterprise. Therefore, the entrepreneur needs to give serious thinking about what legal form to choose for his/her new enterprise. What form of ownership will be chosen depends upon the factors like one's personal capacity to take decisions, bear to risk, economic soundness, educational attainment, etc. This chapter describes the various forms of business ownership or organisation, their comparative
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advantages and disadvantages, selection of an appropriate form of ownership and the ownership form in small-scale enterprises in India.
3.1 Proprietorship
Proprietorship (also called sole trade organisation) is the oldest form of business ownership in India. In a proprietorship, the enterprise is owned and controlled by one person. He is master of his show. He sows, reaps and harvests the output of his effort. He manages the business on his own. If necessary, he may take the help of his family members, relatives and employ some employees. Proprietorship is the simplest and easiest to form. It does not require legal recognition and attendant formalities. This form is the most popular form in India due to the distinct advantages it offers. William R. Basset opines "The one-man control is the best in the world if that man is big enough to manage everything". 3.1 a) Main Features: The main features of proprietorship form of business owners can be listed as follows: 1. One Man Ownership: In proprietorship, only one man is the owner of the enterprise. 2. No Separate Business Entity: No distinction is made between the business concern and the proprietor. Both are one and the same. 3. No Separation between Ownership and Management: In proprietorship, management rests with the proprietor himself/herself. The proprietor is a manager also. 4. Unlimited Liability: Unlimited liability means that in case the enterprise incurs losses, the private property of the proprietor can also be utilized for meeting the business obligations to outside parties.
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5. All Profits or Losses to the Proprietor: Being the sole owner of the enterprise, the proprietor enjoys all the profits earned and bears all losses incurred by the enterprise. 6. Less Formalities: A proprietorship business can be started without completing much legal formality. There are some business that too can be started simply after obtaining necessary manufacturing license and permits. 3.1 b) Advantages: The various advantages proprietorship offers are as follows: 1. Simple Form of Organisation: Proprietorship is the simplest form of organisation. The entrepreneur can start his/her enterprise after obtaining license and permits. There is no need to go through the legal formalities. For starting a small enterprise, no formal registration is statutorily needed. 2. Owner's Freedom to Take Decisions: The owner, i.e. the proprietors free to make all decisions. There is no other person who can interfere or weigh him down. 3. High Secrecy: Secrecy is another major advantage offered by
proprietorship. This is because the proprietor himself handles the whole business and, as such, he knows the business secrets. Added to it, the proprietor is not bound to reveal or publish his accounts. In present day business atmosphere, the less a competitor knows about one's business, the better off one is. 4. Tax Advantage: As compared to other forms of ownership, the proprietorship form of ownership enjoys certain tax advantages. For example, a proprietor's income is taxed only once while corporate income is, at occasion, taxed twice, say, double taxation. 5. Easy Dissolution: In proprietorship business, the entrepreneur is all in all. As there are no co-owners or partners, therefore, there is no scope for the difference of opinion in the case of the proprietor/entrepreneur wants to
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dissolve the business. It is due to the easy formation and dissolution, proprietorship is often used to test the business ideas. 3.1 c) Disadvantages Proprietorship form of ownership suffers from some disadvantages also. The important ones are: 1. Limited Resources: A proprietor has limited resources at his/her funds and savings and, to a limited extent, borrowings from relatives and friends. Thus, the scope for raising funds is highly limited in proprietorship. This, in turn, deters the expansion and development of an enterprise. 2. Limited Ability: Proprietorship is characterised as one-man show. One man may be expert in one or two areas, but not in all areas like production, finance, marketing, personnel, etc. then, due to the lack of adequate and relevant knowledge, the decisions taken by him be imbalanced. 3. Unlimited Liability: Proprietorship is characterised by unlimited liability also. It means that in case of loss, the private property of the proprietor will also be used to clear the business obligations. Hence, the proprietor avoids taking risk. 4. Limited Life of Enterprise Form: The life of a proprietary enterprise depends solely upon the life of the proprietor. When he dies or becomes insolvent or insane or permanently incapacitated, there is very likelihood of closure of enterprise. Say, enterprise also dies with its proprietor.
3.2 Partnership
The proprietorship form of ownership suffers from certain limitations such as limited resources, limited skill and unlimited liability. Expansion in business requires more capital and managerial skills and also involves more risk. A proprietor finds himself unable to fulfill these requirements. This calls for more persons came together with different edges and start business. For example, a
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person who lacks managerial skills but may have capital. Another person who is a good manager but may not have capital. When these persons come together, pool their capital and skills and organize a business, it is called partnership. Partnership grows essentially because of the limitations or disadvantages of proprietorship. Few definitions on partnership: The Indian Partnership Act, 1932, Section 4, defined partnership as the relation between persons who have agreed to share the profits of business carried on by all or any of them acting for all. The Uniform Partnership Act of the USA defined a partnership as an association of two or more persons to carry on as co-owners of a business for profits. So, we can define partnership as an association of two or more persons who have agreed to share the profits of a business, which they run together. This business may be carried on by all or any one of them acting for all. The persons who own the partnership business are individually called partners and collectively they are called as firm or partnership firm. The name under which partnership business is carried on is called Firm Name. 3.2 a) Main features Based on the above discussion the main features of partnership form of business ownership/organisation are as follows: 1. More Persons: As against proprietorship, they should be at least two persons subject to a maximum of ten persons for banking business and twenty for partnership firm. 2. Profit and Loss Sharing: There is an agreement among the partners to share the profits earned and losses incurred in partnership business. 3. Contractual Relationship: Partnership is formed by an agreement oral or written among the partners.
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4. Existence of Lawful Business: Partnership is formed to carry on some lawful business and share its profits or loss. If the purpose is to carry some charitable works, for example, it is not regarded as partnership. 5. Utmost Good Faith and Honesty: A partnership business solely rests on utmost good faith and trust among the partners. 6. Unlimited Liability: Like proprietorship, each partner has unlimited liability in the firm. This means that if the assets of the partnership firm fall short to meet the firms obligations, the partners private assets will also be used for the purpose. 7. Restrictions of Transfer of Shares: No partner can transfer his share to any outside person without seeking the consent of all other partners. 8. Principal Agent Relationship: The partnership firm may be carried on by all partners or any of them acting for all. While dealing with firms transactions, each partner is entitled to represent the firm and other partners. In this way a partner is an agent of the firm and of the other partners. 3.2 b) Advantages As an ownership form of business, partnership offers the following advantages: 1. Easy Formation: Partnership is a contractual agreement between the partners to run an enterprise. Hence, it is relatively ease to form. Legal formalities associated with formation are minimal. Though the registration of a partnership is desirable, but not obligatory. 2. More Capital Available: Partnership overcomes the problem of limited fund to a great extent, because there are more than one person who provide funds to the enterprise. It also increases the borrowing capacity of the firm. Moreover, the lending institutions also perceive less risk in granting credit to a partnership than to a proprietorship because the risk of loss is spread over a number of partners rather than only one.
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3. Combined Talent, Judgement and Skill: As are more than one owner in partnership, all the partners are involved in decision-making. Usually, partners are pooled from different specialized areas to complement each other. This gives the firm an advantage of collective expertise for taking better decisions. Thus, the old maxim of two heads being better than one aptly applies to partnership. 4. Diffusion of Risk: In case of partnership, the losses of the firm are shared by all the partners as per their agreed profit-sharing ratios. Thus, the share of loss in case of each partner will be less than in case of proprietorship. 5. Flexibility: Like proprietorship, the partnership business is also flexible. The partners can easily appreciate and quickly react to the changing conditions. No giant business organisation can stifle so quick and creative response to new opportunities. 6. Tax Advantage: Taxation rates applicable to partnership are lower than proprietorship and company forms of business ownership. 3.2 c) Disadvantages In spite of above advantages, there are certain drawbacks associated with the partnership form of business organisation. Descriptions of these drawbacks/disadvantages are as follows: 1. Unlimited Liability: In partnership firm, the liability of partners are unlimited. Just as in proprietorship, the partners personal assets may be at risk if the business cannot pay its debts. 2. Divided Authority: Sometimes the earlier stated maxim of two heads better than one may turn into too many cooks spoil the broth. Each partner can discharge his responsibilities in his concerned individual area. But, in case of areas like policy formulation for the whole enterprise, there are chances for conflicts between the partners. Disagreements between the partners over enterprise matters have destroyed many a partnership.
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3. Lack of Continuity: Death or withdrawal of one partner causes the partnership to end. So, there remains uncertainty in continuity of partnership. 4. Risk of Implied Authority: Each partner is an agent for the partnership business. Hence, the decisions made by him bind all the partners. At times, an incompetent partner may lend the firm into difficulties by taking wrong decisions. Risk involved in decisions taken by one partner is to be borne by other partners also. 3.2 d) Dissolution of Firm There is a difference between the dissolution of partnership & dissolution of firm. Dissolution of partnership occurs when a partner ceases to be associated with the business, whereas dissolution is the winding up the business. In other words, in case of dissolution of partnership, the business of the firm does not come to an end but there is a new agreement between the remaining partners. But in case of dissolution of firm, the business of the firm is closed up. In brief, dissolution of partnership does not imply dissolution of firm. But, dissolution of firm implies dissolution of partnership also. Following are the various ways in which a firm may be dissolved: 1. Dissolution by Agreement: The partnership firm may be dissolved in accordance with the contract already made between the partners. 2. Compulsory Dissolution: A firm stands compulsorily dissolved under the following circumstances: (a) By the adjudication of all the partners or of all the partners but one as insolvent Or (b) By the happening, of any such events that makes the business unlawful. 3. Dissolution due to Contingencies: A firm stands dissolved on the happening of the any of the following contingencies:
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(a) On expiry of partnership, if constituted for a fixed period (b) On completion of the firms venture for which the firm was formed. (c) On the death of the partner. (d) On the adjudication of a partner as an insolvent. 4. Dissolution by Court: Under any of the following cases, a court may order the dissolution of a firm: (a) Any partner has become of unsound mind. (b) Any partner has become permanently incapable of performing his duties as a partner. (c) A partners misconduct is likely to affect prejudicially the business of the firm. (d) A partner willfully commits breach of the partnership agreement. (e) A partner transfers his interest in the firm, by unauthorized, to a third party. (f) The business of the firm can be carried on at loss only. (g) It is just an equitable, on the basis of any other reasonable ground, that the firm should be dissolved. 3.2 e) Settlement of Accounts on Dissolution Settlement of accounts means closure of all accounts in the books of the firm, as the firms business no longer exists. According to Section 48 of the Indian Partnership Act, 1932, the procedure for the settlement of account after the dissolution of the firm is as follows: The assets of the firm are disposed of and the amount so realised are applied in the following manner: i) Payment of debts due to the third parties. ii) Ratable payment of loans and advances made by the partners to the firm. iii) Payment of partners capital. iv) Payment of surplus, if any, to the partners in their profit sharing ratio.
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The loses of the firm on dissolution have to made up: i) First out of accumulated past profits. ii) Then, out of capitals of partners. iii) Thereafter, out of contribution from the private estates of the partners in their profit sharing ratios. You have seen above that in both - proprietorship and partnership forms of ownership, resources and the life of the organisation were limited and liabilities were unlimited. Given such situation, a developing industrial world needed a legal form of ownership that would provide limited liability for the owners and perpetual life for the business. This is answered through the company form of organisation.
3.3 Joint Stock Company

Meaning A company is an artificial person being created by the law that has an existence separate and apart from its owners. In other words a company is an artificial person created by law, with a distinctive name, a common seal and perpetual succession of members. It can sue and can be sued in its own name. Let us consider a few more definitions of company. The Indian Companies Act, 1956 defines a joint stock company as a company limited by shares having a permanent paid up or nominal share capital of fixed amount divided into shares also of fixed amount, held and transferable as stock and formed on the principles of having in its members only the holders of those shares or stocks and no other persons. One most widely quoted definition of a company (called corporation in USA) is given by Chief Justice Marshal in these words: A corporation is an artificial being invisible, intangible and existing only in contemplation of law. Being the
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mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or an incidental to its very existence. Lord Justice Lindley has defined a company as an association of many persons, who contribute money or moneys worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The person who contribute to it or to whom it belongs are members the proportion of capital to which each member is entitled is his share. In brief, a company can be defined as an artificial (legal) person with its independent legal entity. 3.3 a) Main Features Based on the above definition, given below are the main features of company form of ownership: i) Artificial Legal Person: A company is an artificial person created by law. Though it has no body, no conscience, still it exists as a person. Like a person, it can enter into contracts in its own name and likewise may sue and be sued by its own name. ii) Separate Legal Entity: A company has a distinct entity separate from its members or shareholders. Therefore, a shareholder of the company can enter into contract with the company. He/she can sue the company and be sued by company. iii) Common Seal: Being an artificial person, company cannot sign the documents. Hence, it uses a common seal on which its name is engraved. Putting the common seal on papers relating to companys transactions makes them binding on the company. iv) Perpetual Existence: Unlike partnership, the existence of a company is not affected by death, lunacy, insolvency or retirement of its members or directors. This is because the company enjoys a separate legal existence
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from that of its members. It is said, Members may come, members may go but the company goes forever. It is created by law and is dissolved by law itself. v) Limited Liability: The liability of the members of a company is normally limited to the amount of shares held or guarantee given by them. vi) Transferability of Shares: The member of a public limited company can sell his shares to others without the consent of other shareholders. He has to follow the procedure laid down in the Companies Act for transferring his shares. However, there are restrictions for transferring shares to others in case of a private limited company. vii) Separation of Ownership from Management: The shareholders, i.e., owner being scattered all over country give right to the directors to manage the affairs of the company. The directors are the representatives of the shareholders. Thus, ownership is separated from management. viii) Number of members: In case of a public limited company, the minimum number is seven and there is no maximum limit. But, for a private limited company, the minimum of members is two and the maximum is fifty. 3.3 b) Private and Public Company Private Company: Under Section 3(i)(iii) of the Companies Act, a private company has been defined as a company which by its Articles of Association, (a) Restricts to transfer the shares, if any, (b) Limits the number of its members to fifty, and (c) Prohibits any invitation to the public to subscribe for the shares or the debentures of the company. Public Company: Under Section 3(i)(ii) of the Companies Act, a public company is a company, which is not a private company. By implication, a public company is one which places no restrictions by its Articles of Association on the transfer of
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shares or on the maximum number of members can invite the public to subscribe for its shares and debentures and public deposits. Privileges of a Private Company In spite of certain restrictions imposed on a private company, it enjoys certain privileges under the Companies Act. That is why a substantial number of entrepreneurs prefer to form a private company. Following are the privileges granted to a private company: (i) For forming a private company, only two members are required. (ii) A private company is required to have only two directors. (iii) Such company is not required to file prospectus or a statement in lieu of prospectus with Registrar of Companies. (iv) It can commence its business immediately after incorporation. (v) It is also not required to hold a statutory meeting nor it is required to file a statutory report. (vi) The directors of a private company are not required to give their consent to act or to take up their qualification shares prior to their appointment. (vii) A non-member cannot inspect the copies of the Profit & Loss A/c filed with the Registrar of Companies. (viii) Limit on payment of maximum managerial remuneration does not apply to a private company. (ix) Restrictions on appointment and reappointment of managing director does not apply to such company. (x) A private company is not required to maintain an index of its membership.
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3.3 c) Advantages The important among the advantages of company form of ownership are as follows: 1. Limited Liability: The liability of shareholders, unless and otherwise stated, is limited to the face value of shares held by them or guarantee given by them. 2. Perpetual existence: Death, insanity, insolvency of shareholders or directors do not affect the companys existence. A company has a separate legal entity with perpetual succession. 3. Professional Management: In company business, the management is in the hands of the directors who are elected by the shareholders and are wellexperienced persons. In order to manage the day-to-day activities, salaried professional managers are appointed. Thus, the company business offers professional management. 4. Expansion Potential: As there is no limit to the maximum number of shareholders in a public limited company, expansion of business is easy by issuing new shares and debentures. Companies normally use their reserves for expansion purposes. 5. Transferability of Shares: If the shareholders of a company are displeased with the progress of the business, they can sell their shares anytime. During all this change of ownership, the business continues to operate. 6. Diffusion of Risk: As the membership is very large, the whole business risk is divided among the several members of the company. This is an advantage particularly for small investors. 3.3 d) Disadvantages: In spite of its several advantages, the company form of ownership has also some disadvantages. The important among disadvantages are:
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1. Lack of Secrecy: As per the legal provisions, a company has to make various statements available to the Registrar of the companies, Financial Institutions, the secrecy of business comes down. It is further reduced when the company provides its annual report to the shareholders as the competitors do also find out the details of all financial data. 2. Legal Restrictions: Compared to proprietorship and partnership, a company has to comply with more legal requirements. It claims considerable time and effort. 3. Management Mischiefs: Sometimes the managers and directors misuse the company resources for their personal benefits. This brings losses to the company. 4. Lack of Personal Interest: Unlike proprietorship and partnership, the day-to-day affairs of a company are looked after by salaried managers. Since they are the employees not the owners, they do have hardly any personal interest and commitment in the company. This may result in inefficiency and, in turn, losses.
3.4 Co-operative
Co-operative is yet another form of business ownership. The Co-operative form of organisation is based on the philosophy of self-help and mutual help. It differs from the other three forms of business ownership. The basic line of difference is a co-operative organisation aims at rendering services in place of earning profits. The meaning of co-operative can be understood better with the help of some definitions on co-operative. The Indian Co-operative Societies Act, 1912, Section 4, defined co-operative as a society, which has its objective the promotion of economic interests of its members in accordance with co-operative principles.
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According to International Labour Organisation co-operative organisation is an association of persons, usually of limited means, who have voluntarily joined together to achieve a common economic and through the formation of a democratically controlled business organisation, making equitable contribution to capital required and accepting a fair share of risks and benefits of the undertaking. Thus, we can now define co-operative as a voluntary organisation of those who are economically weak to stand on their own legs. They come together not to earn profits but improve their common economic interest through business propositions. The basic objectives of such organisation are self-help and mutual help. A co-operative organisation needs to be registered with the Registrar of Cooperative Societies of the state in which the societys registered office is located. It should have a minimum of 10 members and no limit for maximum number of members. The members are the owners. They contribute capital to the organisation and get dividends. The liability of the members is limited. The managing committee elected by the members in the annual general meeting manages the affairs of the co-operative organisation. 3.4 a) Main Features Based on the above definitions, we can list out the main features of the co-operative form of ownership or organisation as follows: 1. Voluntary Organisation: Co-operative organisation is a voluntary
association of persons desirous of pursuing a common objective. They can come and leave the organisation at their own will without any coercion or intimation. 2. Democratic Management: As stated earlier, the management of a co-operative organisation is vested in the hands of the managing committee
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elected by the members on the basis of one member-one vote irrespective of the number of shares held by any member. The general body of the members lays down the broad framework within which the managing committee has to function. Democracy is, thus, the keynote of the management of a co-operative society. 3. Service Motive: One basic feature which distinguishes a co-operative organisation from other three forms of business ownership is that the primary objective of a co-operative society is to render services to its members rather than to earn profits. 4. Capital and Return Thereon: The capital is procured from its members in the form of share capital. A member can subscribe subject to a maximum of 10% of the total share capital or Rs.1,000 whichever is higher. Shares cannot be transferred but surrendered to the organisation. The rate of dividends paid to the members/shareholders is restricted to 9% as per the Co-operative Societies Act, 1912. 5. Government Control: In India, the activities of co-operative societies are regulated by the Co-operative Societies Act and the State Co-operative Societies Acts. Co-operative societies are required to submit their annual report and accounts to the Registrar of Co-operatives. 6. Distribution of Surplus: After giving dividends to the members, the surplus of profits, if any, is distributed among the members in the proportion of business they have done with the co-operative society. For example, in case of a consumer co-operative society, bonus is given in the proportion of purchases made by the members from the society. 3.4 b) Advantages In view of these features, this form of ownership offers the following advantages: 1. Easy Formation: Compared to the formation of a company, formation of a co-operative society is easy. Any ten adult persons can voluntarily form
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themselves into an association and get it registered with the Registrar of co-operatives. Formation of a co-operative society also does not involve long and complicated legal formalities. 2. Limited Liability: Like company form of ownership, the liability of members is limited to the extent of their capital in the co-operative societies. 3. Perpetual Existence: A co-operative society has a separate legal entity. Hence, the death, insolvency, retirement, lunacy, etc., of the members do not affect the perpetual existence of a co-operative society. 4. Social Service: The basic philosophy of co-operative is self-help and mutual help. Thus, co-operatives foster fellow feeling among their members and inculcate moral values in them for a better living. 5. Open Membership: The membership of co-operative societies is open to all irrespective of caste, colour, creed and economic status. There is no limit on maximum members. 6. Tax Advantage: Unlike other three forms of business ownership, a co-operative society is exempted from income-tax and surcharge on its earnings up to a certain limit. Besides, it is also exempted from stamp duty and registration fee. 7. State Assistance: Government has adopted co-operatives as an effective instrument of socio-economic change. Hence, the Government offers a number of grants, loans and financial assistance to the co-operative societies to make their functioning more effective. 8. Democratic Management: The management of co-operative society is entrusted to the managing committee duly elected by the members on the basis of one-member one vote irrespective of the number of shares held by them. The proxi is not allowed in co-operative societies. Thus, the management in co-operatives is democratic.
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3.4 c) Disadvantages In spite of its numerous advantages, the co-operative also has some important disadvantages which must be seriously considered before opting for this form of business ownership. The important among the disadvantages are: 1. Lack of Secrecy: A co-operative society has to submit its annual reports and accounts with the Registrar of Co-operative Societies. Hence, it becomes quite difficult for it to maintain secrecy of its business affairs. 2. Lack of Business Acumen: The member of co-operative societies generally lack business acumen. When such members become the members of the Board of Directors, the affairs of the society are expectedly not conducted efficiently. These also cannot employ the professional managers because it is neither compatible with their avowed ends nor the limited resources allow for the same. 3. Lack of Interest: The paid office-bearers of co-operative societies do not take interest in the functioning of societies due to the absence of profit motives. Business success requires sustained efforts over a period of time which, however, does not exist in many co-operatives. As a result, the cooperatives become inactive and come to a grinding halt. 4. Corruption: In a way, lack of profit motive breeds fraud and corruption in management. This is reflected in misappropriations of funds by the officers for their personal gains. 5. Lack of Mutual Interest: The success of a co-operative society depends upon its members utmost trust to each other. However, all members are not found imbued with a spirit of co-operation. Absence of such spirit breeds mutual rivalries among the members. Influential members tend to dominate in the societys affairs.
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3.5 Selection of an appropriate form of Ownership Structure

You have understood that the various forms of business ownership have their relative advantages and disadvantages. Thus, none of them is found idle in all respects. In a way, selecting one best form of business ownership is like looking for a shirt that may fit everybody in the family. The best form of ownership is one, which helps an entrepreneur attain the business objectives decided upon by him/her. While selecting the best form of ownership structure, the entrepreneur should keep the following considerations in his/her mind: 1. Nature of Business: The selection of an appropriate form of business ownership depends upon, to a great extent, the nature of the proposed business itself. For example, the business that requires personal attention and skill for their success are usually organized as proprietary concerns. Business requiring pooling of funds and skills are generally run as partnership firms. For business involved in large-scale production, the company form of business ownership is preferred. 2. Area of Operations: The area of operation has also an important bearing on the selection of the form of ownership. If the operation of a business is confined to an area or locality only, the appropriate form of ownership will be proprietorship. On the contrary, in case the area of operation is widespread catering to national and international markets, the suitable form of business ownership may be a company. 3. Degree of Control: In case, direct control over business operations is required, the suitable form of ownership may be proprietorship or partnership. In case direct control over business operations is not needed, the best form of business ownership will be a company. 4. Capital Requirements: The capital required in the business also determines the selection of business ownership. If business requires a small amount of capital, the best form of ownership may be either proprietorship or
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partnership. In case of huge capital requirements, the company form of ownership will be the best. 5. Extent of Risk and Liability: Business involves risk. Is an entrepreneur ready and capable to bear risk involved in business; he can organize his business on proprietorship or partnership. But if the entrepreneur is hesitant to bear the risk involved in business, he/she can go for a company where individual risk is limited. 6. Duration of Business: If business is proposed for a definite duration and on adhoc basis, proprietorship or partnership are better forms of business ownership. The reason is that they are easy to form and dissolve. In case, the business is to be run on permanent basis, it can be organized as company or a co-operative because they enjoy perpetual succession. 7. Government Regulations: If an entrepreneur does not like much government involvement in his/her business, he can select proprietorship or partnership as the form of his business ownership instead of a company or co-operative where the government rules and regulations apply more.
Exercises: 1) How to form a co-operative society ? How it is beneficial ? 2) Which form of organisation is best suited to a small-scale business ? why ? 3) Compare and contrast Joint Stock Company & Partnership firm.
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Unit 4
Structure
4.1 4.2 4.3 4.4 4.5 4.6 Need for Financial Planning Sources of Finance Capital Structure Term Loans Sources of Short-Term Finance Other Financial Institutions
Financing of Enterprise
Learning Objectives
Acquiring funds for the purpose of starting and maintaining a small industries is the theme of this unit. Different institutions that directly or indirectly assists the small entrepreneurs are discussed in this chapter.
4.1 Need for Financial Planning

Finance is one of the important prerequisites to start an enterprise. In fact, it is the availability of finance, that facilitates an entrepreneur to bring together land, labour, machinery and raw material to combine them to produce goods. The significance of finance in production is elucidated like a lubricant to the process of production. Finance is the life-blood of enterprise. Financing an enterprise whether large or small is a critical element for success in business. Instances are gallore to cite that many enterprises, though potentially successful, failed because they were under-capitalised. Therefore, what follows is that, every enterprise, should clearly chalk-out future financial requirement in its very beginning itself. The decisions taken by the entrepreneur well in advance regarding the future financial aspects of his/her enterprise is called financial planning. In other words financial planning deals with futurity of present decision in terms of financial
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aspects of an enterprise. In short, financial planning is a financial forecast made for the enterprise in the beginning itself. In a financial plan/financial forecast, the entrepreneur should clearly answer the following three questions : 1. How much money is needed ? 2. Where will money come from ? and 3. When does the money need to be available ? As regards the money needed, it can be estimated by developing a statement of various assets required by the enterprise. While estimating the money needed, the entrepreneur should take the following three things into consideration. 1. There should be adequate money to pay the purchase considerations. 2. There should be sufficient capital at his/her disposal to support the business operations up to the three initial months of the enterprise. 3. Lastly, enough provision should be made to meet unexpected/unplanned business expenses. Thus, the total of these three amounts will constitute the total money needed to start the enterprise. Integral to total amount needed is to decide about its arrangement or sources. There are two ways of classifying the financial needs of an enterprise. 1. On the basis of extent of permanence, the financial needs are classified into two types a) Fixed Capital and b) Working Capital 2. On the basis of period of use, we can classify the financial needs into the following two types : a) Long-term Capital/Finance and b) Short-term Capital/Finance
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Fixed Capital The money invested in some fixed assets or durable assets like land, building, machinery, equipment, furniture, etc., is known as fixed capital. These assets are required for permanent use, that is, for a long period of time. Working Capital The money invested in current assets like raw material,
finished goods, debtors, etc., is known as working capital. In other words money required for day-to-day operations of business/enterprise is called working capital. Long-term Capital This is such money whose repayment is arranged for more than five years in future. The sources of long-term finance could be owners equity, term-loan from financial institutions, credit facilities from the commercial banks, hire-purchase facilities from specific organisations etc. Short-term Capital This is a borrowed capital/money that is to be repaid within one year. The sources of short-term finance including bank borrowings for working capital, deposits or borrowings from friends and relatives etc.
4.2 Sources of Finance

Required funds could broadly be classified into two sources. These are : 1. Internal Sources 2. External Sources 4.2 a) Internal Sources Under this source, funds are raised from within the enterprise itself. The internal sources of financing could be owners capital known as equity, deposits and loans given by the owner, the partners, the directors, as the case may be, to the enterprise. One source for raising funds internally may be personal loans taken by the entrepreneurs on his/her personal assets like Provident Fund, Life Insurance Policy, buildings, investments, etc. In addition to these, in case of a running enterprise, funds could also be raised through the retention of profits or
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conversion of some assets into funds. The principle of financial management also suggests that an entrepreneur should religiously plough back a good portion of his/her profits into the enterprise itself. However, the scope for raising funds from internal sources particularly in the case of small-scale enterprises remains limited.
4.2 b) External Sources The funds raised from other than internal sources are from external sources. The external sources usually include the following : 1. Deposits or borrowings from relatives and friends and others. 2. Borrowings from the banks for working capital purposes. 3. Credit facilities from the commercial banks. 4. Term-loans from financial institutions. 5. Hire-purchase or leasing facility from the National Small Industries Corporation (NSIC) and State Small Industries Corporations (SSICs) 6. Seed/Margin money, subsidies from the Government and the financial institutions If we now lump both the sources together, these can broadly be classified as follows : 1. Personal funds or Equity Capital 2. Loans from relatives and friends 3. Mortgage Loans 4. Term-Loans 5. Subsidiaries
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4.3 Capital Structure

Maintaining the capital structure in any enterprise depends on a variety of factors such as: 4.3 a) Nature of Business : The nature of the business itself is one of the factors determining capital structure to be maintained. The business subject to wide fluctuations in sales need to maintain small proportion of borrowed funds, i.e. debt capital. Companies manufacturing televisions, refrigerators, machine tools and like, are examples of business subject to fluctuations in their sales. On the contrary, the business firms dealing in items/goods having inelastic demand like essential consumer goods, may have larger proportion of borrowed capital. The reason is that these firms generally have stable earnings. The capital structure of companies is also determined by the competitiveness found among them. For example, in case of ready-made garments industry, competition is mainly based on styles and fashions which are subject to frequent and unpredictable changes. As such, these firms have to depend less on borrowed capital and more on equity or owners capital. 4.3 b) Size of the Enterprise: Small enterprises have to relay less on borrowed capital and depend more on owners capital. This is because investors consider lending to small firms more risky. On the other hand, large enterprises are considered less risky. Therefore, investors believe that their money is safe and, hence, prefer to lend money to large enterprises. This enables the large enterprises to raise funds from different sources. 4.3 c) Trading on equity: In case the rate of return on capital employed is more than the rate of interest on debentures or rate of dividend on preference shares, it is called trading on equity or leverage effect. In such case, there is greater dependence on borrowed capital in the capital structure.
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4.3 d) Cash Flows: The ability of a business to discharge its fixed obligations depends upon the availability of cash, i.e. cash flows. As such more the cash inflows, more will be the proportion of borrowed capital in the capital structure. 4.3 e) Purpose of Financing: The purpose of financing also affects the capital structure of the enterprises. In case, funds are required for some directly productive purposes, for example, purchase of new machinery, the enterprise may rely on external sources for raising the required funds. This is because the enterprise will be in a position to pay the fixed charges, or say, interest out of the profits so earned. In contrast, in case the enterprise is required to raise funds for unproductive purposes like spending on the employees welfare facilities, it will have to depend on owners capital. In other words, it will raise funds by issue of equity shares. 4.3 f) Provision for future: The scope of changing the capital structure happens to be a basic consideration for determining the capital structure of an enterprise. As a general principle, it will always be safe to keep the best security to be issued in the last instead of issuing all types of securities in one stroke only. In this regard, what Gerestenberg opined is worth mentioning: Manager of corporate financing operations must always think of rainy days or the emergencies. The general rule is to keep your best security or some of your best securities till the last.
4.4 Term Loans

Simply stated, loans taken for a definite period of time are called term loans based on period, loans are broadly classified into two types: 1. Short -Term Loans and 2. Long-Term Loans The term Term Loans is used for long-term loans.
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4.4 a) Long-Term Loans: These are the loans taken for a fairly long duration of time ranging from 5 years to 10 or 15 years. Long-term loans are raised to meet the financial requirements of enterprise/company for acquiring the fixed assets which include the following: 1. Land and site development 2. Building and civil works 3. Plant and machinery 4. Installation expenses 5. Miscellaneous fixed assets comprising vehicles, furniture and fixtures, office equipment and so on. In case of units to be located in backward areas, another element of miscellaneous fixed cost includes expenditure to be incurred in infrastructure facilities like roads, railways sidings, water supply, power connection etc. Term loans, or say, long-term loans are also required for expansion of productive capacity by replacing or adding to the existing equipment. 4.4 b) Sources of Term Loans The following are the sources of raising term loans : 1. Issue of shares 2. Issue of debentures 3. Loans from Financial Institutions 4. Loans from Commercial Banks 5. Public deposits 6. Retention of profits 4.4 c) Shares: Share is unit into which the total capital of a company is divided. As per Section 85 of the Companies Act, 1956, a public limited company can issue the following two kinds of shares : (a) Preference Shares, and (b) Equity Shares.
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Equity Shares: What is not preference share is equity share. In other words, equity shares are entitled to dividend after the payment of dividend on preference shares. Based on the types of shares, there are two types of capitals, (i) Preference Share Capital, and (ii) Equity Share Capital. 4.4 d) Debentures: Issue of debentures is another method of raising term loans from the public. A debenture is an instrument acknowledging a debt by a company to a person or persons. Section 2 (12) of the Indian Companies Act, 1956 defines a debenture as follows : Debenture includes debenture stock, bonds and any other securities of the company whether constituting a charge on the companys assets or not. A company can issue various types of debentures, viz., redeemable and irredeemable, registered and bearer, secured and unsecured and convertible and non-convertible debentures. 4.4 e) Difference Between Shares and Debentures: distinction between shares and debentures are as follows : 1. Representation A share represents a portion of capital whereas a debenture represents a portion of debt of a company. 2. Status A shareholder is a member of the company, but a debenture holder is a creditor of the company. 3. Return A shareholder is paid dividend while a debenture holder is paid interest. 4. Right of Control The shareholders have a right of control over the working of the company whereas the debenture holders dont have such right. 5. Repayment Debentures are normally issued for a specified period after which they are repaid. But, such repayment is not possible in case of shares. The major points of
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6. Purchase A company cannot purchase its own shares from the market, but it can purchase its own debentures and cancel them. 7. Order of Repayment In liquidation, debenture holders get priority in payment, but shareholders are the last to get payment after all claims have been fully satisfied.
4. 5 Sources of Short-Term Finance

Short-term finance is obtained for a period upto one year. These are required to meet the day-to-day business requirements. In other words, short-term finance is obtained to meet the working capital requirements of the enterprise. The sources of short finance could be 1. Loans from Commercial Banks 2. Public Deposits 3. Trade Credit 4. Factoring 5. Discounting Bills of Exchange 6. Bank Overdraft and Cash Credit 7. Advance from Customers 8. Accrual Accounts Finance is one of the essential requirements of any enterprise. Before actually setting up their units, small entrepreneurs need to know very clearly about the type and extent of their financial requirements. Integral to financial requirements is to know about the possible alternative sources from which finance can be availed of. Given the shortage or lack of entrepreneurs own funds/ resources, the Government of India as a part of its policy of promotion of small-scale sector in the country, has set up a host of institutions to meet the financial requirements of small entrepreneurs.
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4.5 a) Commercial Banks: The Scheduled Commercial Banks (SCBs) in the country comprise the State Bank of India (SBI) and its associated banks, nationalised banks, private sector banks, regional rural banks (RRBs) and foreign banks. During 1994-95, ten more banks were given the status of SCBs and one, viz. Bank of Karad which was taken over by Bank of India was excluded. As on March 31, 1995, the total number of branches of SCBs stood at 62,067, of these 35,060 (56.5% of the total) were in rural areas. For a long period, commercial banks did not come forward to extend financial assistance to the small-scale industries because of the SSIs weak economic base. The first lead in this regard was taken by the SBI, in consultation with the Reserve Bank of India (RBI), in March 1956 by setting up a pilot scheme for the provision of credit for small-scale was later extended to all branches of the SBI. The commercial banks started taking initiation in financing SSIs in a greater way only after the bank nationalization in July 1969. Normally, the commercial banks provide assistance for working capital requirements of SSIs. Over the years, they have also started providing term finance as is indicated by the data compiled by the RBI that of all the advances given to SSIs by the commercial banks, the share of the term loan accounted for nearly 30%. A notable feature in the financing of SSIs has been the introduction of the Lead Bank Scheme by the RBI. Under this scheme, each district has been allotted to one scheduled commercial bank for intensive development of banking facilities. The introduction of Credit Guarantee Scheme, in 1960 was a big fillip in the field of commercial bank financing to SSIs. Initially, this scheme was introduced in 22 district on experimental basis. Later, it was extended to all over the country. Further, the RBI set up a Committee. Based on the recommendations of the Committee, the RBI introduced a special package of measures for financing SSIs and advised banks to take various measures aimed at increasing the credit flow to the SSIs and arresting the problem of sickness in small-sector. Availability of credit to the SSI sector improved further with the stipulation on foreign banks to
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extend atleast 10% of their net bank credit to the SSI sector and to deposit the shortfall, if any, with the Small Industries Development Bank of India (SIDBI). According to the figures released by the Industrial development Bank of India (IDBI), the outstanding gross bank credit to industrial sector stood at Rs. 102953 crores as on March 31, 1995 of which Rs. 27,612 crores (27% of total) were given to the SSIs by the commercial banks. It is interesting to mention that the bank credit to small sector as a percentage to total bank credit is on increase year after year.
4.6 Other Financial Institutions

4.6 a) Industrial Development Bank of India (IDBI): Prior to 1964, there was not any apex organisation to co-ordinate the function of various financial institutions. Then, V. V. Bhat rightly pointed out that the country needed a central development banking institutions for providing dynamic leadership in the task of promoting a widely diffused and diversified and yet vitable process of industrialization. It was to fulfil this objective, the Government decided to establish the Industrial Development Bank of India (IDBI). The IDBI was established on July 1, 1964 under the Act of Parliament as the principal financial institution in the country. Initially, it was set up as wholly owned subsidiary of the Reserve Bank of India. In February 1976, the IDBI was made an autonomous institution and its ownership passed on from the Reserve Bank of India to the Government of India. The IDBI provides assistance to the small-scale industries through its scheme of refinance and, to a limited extent, through its bills rediscounting scheme. As its not feasible for the IDBI to reach a large number of small-scale industries scattered all over the country, the flow of its assistance to this vast number has, therefore, been indirect in the form of refinancing of loans granted by the banks and the State Financial Corporations (SFCs). The IDBI has shown its particular
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interest in the development of small scale industries. Of particular mention is the setting up of the Small Industries Development Fund (SIDF) in May 1986 to facilitate the development and extension of small-scale industries. In 1988, the IDBI also launched the National Equity Fund Scheme (NEFS) for providing support in the nature of equity to tiny and small-scale industries engaged in manufacturing, cost not exceeding Rs. 5 lakhs. The scheme is administered by the IDBI through nationalized banks. The IDBI has also introduced the single window assistances of term loans and working capital assistance to new, tiny and small-scale enterprises. Last but no means the least, the IDBI has also set up a Voluntary Executive Corporation Cell (VECC) to utilise the services of experienced professional for counseling small units, tiny and cottage units and for providing consultancy support in specific areas. In order to make the IDBIs co-ordinating role more effective, the Narasimham Committee has suggested that the IDBI should give up its direct financing function and perform only promotional apex and refinancing role in respect of other institutions like SFCs and SIDBI, etc. The direct lending function should be entrusted to a separate finance company, especially set up for this purpose.
4.6 b) Industrial Finance Corporation of India Ltd. (IFCI): The Government of India set up the Industrial Finance Corporation of India (IFCI) under IFCI Act in July 1, 1993, it has been brought under Companies Act, 1956. The IFCI extends financial assistance to the industrial sector through rupee and foreign currency loans, underwriting/direct subscriptions to shares/debentures and guarantees and also offers financial services through its facilities of equipment procurement, equipment finance, buyers and supplier credit, equipment leasing and finance to leasing and hire purchase companies. It also provides merchant banking with its Head Office in Delhi and a bureau in Bombay.
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The financial resources of the IFCI are constituted of the following three components (i) Share Capital, (ii) Bonds and Debentures; and (iii) Other Borrowings. The Industrial development Bank of India, Scheduled Banks, insurance companies, investment trusts and the co-operative banks are the share holders of the IFCI. Apart from paid-up capital and reserves, the major sources of the IFCI are issue of bonds and debentures, borrowings from the Government, the Reserve Bank of India, Industrial development Bank of India and foreign loans. The IFCI started its lending operations on a modest scale in 1948. The operations of the IFCI have grown over the years and so, have its assistance. In recent years, the IFCI has started new promotional schemes, such as (a) interest subsidy scheme for women entrepreneurs; (b) consultancy fee subsidy schemes for providing marketing assistance to small-scale industries ; (c) encouraging the modernization of tiny, small-scale ancillary units; and (d) control of pollution in the small and medium scale industries. The IFCI has shown its growing concern in the development of backward districts. No doubt, the IFCI has experienced impressive performance over the years. 4.6 c) Industrial Credit and Investment Corporation of India Ltd. (ICICI): The Industrial Credit and Investment Corporation of India Ltd. (ICICI) was set up under the Indian Companies Act with the primary objective of developing small and medium industries in the private sector. Its issued capital has been subscribed by the Indian banks, insurance companies and the individuals and corporations of the United States, the British Eastern Exchange Bank and other companies and general public in India.
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The ICICI performs the following functions : (i) It provides assistance by way of rupee and foreign currency loans, underwriting and direct subscriptions to shares/debentures and guarantees. (ii) It offers variety of financial services such as deferred credit, leasing credit, installment sale, asset credit and venture capital. (iii) It guarantees loans from other private investment sources. The ICICI has recently set up a Merchant Banking Division which is working very creditably. It has also set up ICICI Asset Management Company Ltd. in June 1993 to operate the schemes of the ICICI Mutual Fund. Yet another subsidiary called ICICI Investors Services Ltd. (March 1994) and ICICI Banking Corporation Ltd. (January 1994) have started operations. 4.6 d) Industrial Reconstruction Bank of India (IRBI): The Government of India set up the Industrial Reconstruction Corporation of India (IRCI) in April 1971 under the Indian Companies Act mainly to look after the special problems of sick units and provide assistance for their speedy reconstruction and rehabilitation. In August 1984, the Government of India passed an Act converting the Industrial Reconstruction Corporation of India (IRCI) into the Industrial Reconstruction Bank of India (IRBI). The IRBI has to function as the principal All-India Credit and Reconstruction Agency for industrial revival, assisting and promoting industrial development and rehabilitating industrial concerns. 4.6 e) Life Insurance Corporation of India (LIC): The Life Insurance Corporation of India (LIC) was established under the LIC Act, 1956 as a whollyowned corporation of the Government of India, on nationalization of the life insurance business in the country. LIC offers a variety of insurance policies to extend social security to various segments of society. It has been deploying its funds in accordance with plan priorities.
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4.6 f) Unit Trust of India (UTI): was established in the year 1964, mobilises savings of small investors through sale of units and channelises them into corporate investments, with varieties of unit schemes. 4.6 g) State Financial Corporations (SFCs): The Industrial Finance Corporation of India (IFCI) set up in 1948 used to provide financial assistance to only large sized industrial undertaking. In order to cater the financial requirements of a large number of small-scale units, the State Financial Corporation Act was passed by the Parliament on September 28, 1951 under which the State Financial Corporations (SFCs) could be set up. The management of SFC are similar to that of the IFCI. The main functions of SFCs has been to provide long-term finance to small and medium sized industrial units organised as proprietary, partnership, co-operative, public or private company concerns. 4.6 h) Small Industries Development Bank of India (SIDBI): With a view to ensuring larger flow of financial and non-financial assistance to the small-scale sector, the Government of India set up the small Industries Development Bank of India (SIDBI) under a special Act of the parliament in October 1989 as a wholly owned subsidiary of the IDBI. The important functions of SIDBI are as follows : (1) To initiate steps for technological upgradation and modernisation of existing units. (2) To expand the channels for marketing the products of SSI sector in domestic and international markets. (3) To promote employment oriented industries especially in semi-urban areas to create more employment opportunities. 4.6 i) Export - Import Bank of India (EXIM Bank): The Export-Import Bank of India, commonly known as the EXIM bank, was set up on January 1, 1982 to take over the operations of the international finance wing of the IDBI and to
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provide financial assistance to exporters and importers to promote Indias foreign trade. It also provides refinance facilities to the commercial banks as financial institutions against their export-import financing activities. The important functions of the EXIM Bank are as follows : (1) Financing of exports and import of goods and services both of India and of outside India. (2) Providing finance for joint ventures in foreign countries. (3) Undertaking merchant banking functions of companies engaged in foreign trade. (4) Providing technical and administrative assistance to the parties engaged in export and import business. (5) Offering buyers credit to the foreign governments and banks. (6) Providing advance information and business advisory services to Indian exporters about multilaterally funded projects overseas. In spite of various financial Institutions, the entrepreneur must have the ability to search for such suitable institution that caters his need to start, maintain and develop industrial activity.
Exercises: 1) Write a Note on: (a) IDBI (b) ICICI (c) SFC 2) Critically evaluate the role of financial institutions in Development of small business units.
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Structure
5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 Marketing Management Concept of Marketing Problems of Marketing Market assessment Market segmentation Marketing Mix Branding and Packaging Pricing Policy Pricing Considerations Pricing Policies/Methods
Marketing Management
5.10 Resale Price Maintenance (RPM) 5.11 Distribution Channels or methods of Marketing 5.12 How to select a suitable Channel ? 5.13 Reserved items for exclusive purchase from Small-scale Enterprises
Learning Objectives Different Marketing problems faced by an entrepreneur is highlighted with special reference to marketing concepts, segmentation, Marketing mix and strategies of Marketing. 5.0 Marketing Management
You have seen in the previous chapter that having decided various issues like the location of the plant, design of the product and its quality, the entrepreneur reaches to the stage when production has to start. You also know that production is meant for consumption. Successful production is one that sells. But, before any product or service is offered for sale in the market, several decisions have to be taken in regard to its marketing. For example, the price of the product has to be determined, the method of marketing has to be identified and the channels of
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distribution have to be worked out. The decisions to these matters require a sound and thorough assessment of the marketing in small business has to operate. It is better to have the facts than merely have a feel for how a product will sell. The same constitutes the subject matter of the present chapter. To begin with, let us start with reflecting upon what is meant by marketing.
5.1 Concept of Marketing

Marketing is very much integral to market. Market is a place where the sellers and buyers assemble to exchange their products for money and vice versa. Production precedes marketing. Production has undergone changes from time to time with changing business environment. Accordingly, the concept of marketing has also altered from one point of time to another. These concepts are broadly classified into two categories: 1. Traditional Concept 2. Modern Concept Traditional Concept: This concept corresponds to the early production phase when there was a general scarcity of manufactured goods in the market. Then, the major function of marketing was to make the goods widely available to the customers at an affordable price. The concept of marketing was held accordingly. Converse, Huegy and Mitchell observes: Marketing includes activities involved in the flow of goods and services from production to consumption. According to American Marketing Association, Marketing is the performance of those business activities that direct the flow of goods and services from producer to consumer or user. Thus, the traditional concept of marketing is product-oriented. Modern Concept: With the passage of time, the industrial activity intensified in terms of quantity, quality and variety of the products. This made the customers more sharp-sighted and chooser ones. Now, the customers were not ready to
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buy whatever was offered to them by the producers. They started to buy the goods or services that were more beneficial to them in terms of quality, price, satisfaction, durability, look and so on. The benefits to the consumers may be tangible or intangible. Therefore, the producers were compelled to produce what the customers want. Thus, a new approach, of course more scientific, emerged. The new approach relies on to produce the goods or offer services that satisfy the customers demands. It is also termed as marketing orientation. This modern concept of marketing can be understood in a better way by going through the following definitions. According to Stanton, Marketing is a total system of interacting business activities designed to plan, price, promote and distribute want satisfying products and services to present the potential consumers. Kotler opines, Marketing is a social and managerial process by which individuals and groups obtain what they need and want through creating and exchanging products and values with others. Now, we can easily distinguish between the two concepts. While the traditional concept of marketing focuses on the need of the producers, i.e., the seller, the modern concept concerns the needs of the consumer, i.e., the buyer.
5.2 Problems of Marketing

Production is the servant of market. Production is meaningless without market. Therefore, the very purpose of an enterprise is to produce what the customer will buy. All industries whether small or large, face problems in marketing their products or services. But, small scale enterprises are more plagued by the marketing problems. In India, the utter failure of small-scale enterprises in the front of marketing of their products is commonly noticed over time. Notwithstanding, there are two main reasons conditioning the marketing of products produced by small enterprises. First, small enterprises cannot withstand
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the cut throat competition in respect of quality, cost, standardization of the products with medium and large scale industries. In fact, the same is attributed to one of the major reasons limiting the fuller utilization of their production capacity. Second, the small enterprises of our country neither have the full appreciation of the importance of marketing nor had they employed and implemented effective marketing techniques in their enterprises. In this regard, the observation made by the Ford Foundation seems worth quoting: In spite of an extensive potential market, the Indian small entrepreneurs were most reluctant towards efficient marketing technique and consequently have met with utter failure on the front of marketing of their products. When it comes to the question of markets for which the products are produced, most of the small entrepreneurs appear to be as much anchored to the past as they are in the methods of manufacturing. Types and areas of consumption are shifting but only a few products try to follow them. This, in part at least, is due to the prevailing system of distribution. Few channels of communications exist between the small manufacturer and the ultimate customer. In many cases, the manufacturer does not even know in what part of the country his wares are used, or who buys them. The Japanese delegation on small-scale industries in India also gave a similar view that the most knotty point in the operation of small-scale enterprises and cottage industries is that the industry is isolated from the market and unable to understand quickly and accurately the prevalent trend of the market. According to a field study of 50 small-scale enterprises in a notified backward region of Uttar Pradesh, there are three major problems of marketing of small industry products. These are: 1. Competition with Modern Sector: The market competition of small enterprises with the modern sector has aggravated due to several factors
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over the years. Although the traditional hallmarks of the small-scale industries are slowly yet steadily changing. There is an implicit assumption of poor quality for goods manufactured in small enterprises. This sector needs to cater to wide diversity and changing tastes and preferences of their client, which they do fail. 2. Lack of Sales Promotion: Advertisement of the products through the elaborate sales promotion methods such as trained salesman. Advertisement in cinema slides, posters, papers, magazines and so on has become increasingly fashionable particularly in the case of medium and large-scale industries. But, small-scale industries lack in the required resources as well as knowledge to practice the methods of sales promotion. As a result, the former usually have patented names which facilitate the dealers in selling their products without making much efforts. It can also be postulated that in the case of the products of small-scale industries, at least at their initial stage, persuasive capacity of the dealer plays an important role in influencing their sales. In such case, the dealers demand and producers are bound to pay a relatively higher rate of commission than those paid by the large-scale producers. This reckets high unit cost and, thus, impinges on their capacity to complete with the large sector. In this way, the small-scale enterprises are unstirred. If these small enterprises make a modest start to, it is to be stagnated and dead out or devoured by the successful bigger enterprise. 3. Weak in Bargaining Power: In case of handicraft units such as copper smithy and carpet weaving units, the price realised is usually better when the sales are made at the place of production itself than these products are marketed in the fairs. It looks that, very possibly, the manufactures are in a better bargaining position at home than in other locations like fairs where they take products for selling. Other studies also support this finding. One can add some other problems depending upon the type of enterprise, yet these are the major ones encompassing various problems in one way or other.
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5.3 Market assessment

You have understood marketing is to produce what the customers want. But it is not very easy task to determine what the customers actually want. Any market is composed of a large number of customers/consumers with varying backgrounds like education, income, preferences, likes and so on. Further, these heterogeneous customers are spread over nearer and distant places of the enterprise. As a result, there is a wide variation in their wants. It is difficult, if not impossible, for a small-scale enterprise to produce a variety of products to satisfy the varied wants of all the customers. That is why a small-scale enterprise has to decide which group of customers, also called target segment, will be of particular interest to the enterprise. Having identified the target group to be served, the demand for the product by the target group can be estimated. Demand forecasting helps the entrepreneur in this task. Therefore, let us reflect upon what is meant by demand forecasting referred to above. Demand Forecasting of Market Demand. The simplest and commonest definition of demand refers to the willingness and ability of customers to buy products or services. In other words, when the customers are willing and at the same time able to buy products or services, we say that there is a demand for the products or services. When we consider this definition for all the potential customers having both willingness and ability to buy a product, it is termed as total market. Considering that an enterprise has its own operational area, the definition of demand can be narrowed down accordingly. Based on it, have a look at the following widely accepted definition of market demand given by Philip Kotler: Market demand for a product is the total volume that would be brought by a defined customer group in a defined geographical area, time period, marketing environment and marketing programmes which must be well understood and
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taken into consideration while estimating market demand, also termed as demand forecasting. It follows from above definition that there are eight variables viz., product, total volume, bought, customer group, geographical area, time period, marketing environment and marketing programmes which must be well understood and taken into consideration while estimating market demand, also termed as demand forecasting. There are a number of techniques available for forecasting demand. The important ones are: Survey Method and Statistical Method.
5.4 Market Segmentation

You have just read that total market demand is composed of a large number of customers having different characteristic. Their demand for products,
preferences, and liking with respect to prices, promotional strategies etc. vary. Thus, in order to tap the potential in different groups of customers, different marketing approaches need to be developed. For this, the customers with homogeneous characteristics from the hetergogeneous market are identified. This exercise is termed as market segmentation. Thus, market segmentation is an attempt to make the marketing strategies customer-oriented. Different people have defined market segmentation differently. Let us consider a few definitions given by different persons. In the opinion of R. S. Davar, Grouping of buyers or segmenting the market is described as market segmentation. Philip Kotlet opines, Market segmentation is the sub-dividing of a market into homogeneous subsets of customers where any subset may conceivably be selected on a market target to be reached with a distinct marketing mix.
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To put in the simple words, market segmentation can be defined as the act of dividing the market into distinctive and homogeneous groups of customers. The importance of market segmentation or target group is that is helps the entrepreneur in fine tuning his/her efforts to what the target group or customers want. Basis or Criteria of Market Segmentation: The market segmentation can be carried out on the basis of various defining variables, viz., age, sex, education, income, geographical location, etc. Some commonly used bases / variables are: 1. Geographical Variables 2. Demographic Variables 3. Educational Variables 4. Income Variables 5. Psychological Variables 1) Geographical Variables: A word about each of these variables will help us understand the identification of target group, i.e. market segmentation. The characteristics of the customers vary across the geographical locations, Hence, a firm need to classify its customers by rural urban origins. Because, the urban elite is generally highly educated and have high level of income. On the contrary, the rural mass is generally highly educated and have high level of income. On the contrary, the rural mass is generally illiterate and its income level is woefully low. Similarly, some firm may target its efforts in one state, some other in few states, yet others in the entire country and still others may spread their wings across different continents. In all these cases, the geographical variables define the market segments. 2) Demographic Variables: Demographic variables include population variables like age, sex, marital status, number of children, etc. it is well-known fact that demand for products widely vary with regard to population variables. An excellent example of demographic segmentation in the Indian society is provided by
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population within age-group four to ten years can be easily correlated to specific products like toys, comic books. Thus, the demographic variables are commonly used as bases for identifying specific customer groups. 3) Educational Variables: It is confirmed that educational attainment and incomes are highly correlated. Education itself creates certain differences. For example, the reading habits of college students differs considerably from the high school students. On the whole, variation in the living styles of literate and illiterate people are quite visible. The proportion of literate population is quite small which varies across the States. Thus, the educational attainment of the population, i.e., customers becomes a sensitive basis for market segmentation. 4) Income Variables: Income of the customers provides an important basis for market segmentation. It is the level of income that influences the quantity and quality of products demanded. The levels of income vary considerably across places, occupations, educational attainment and so on. Further, the purchasing capacity of an individual depends upon the level of income. The customers behaviour have a correlation with the income levels of the customers. The varying living styles of the American and the Indian, for example, supports the above fact. Thus, while introducing market segmentation, an entrepreneur has to concentrate on the levels of income of the consumers concerned. 5) Psychological Variables: Besides, the variables discussed above, there are some other variables also which relate to the psychology of the consumers. These outstanding psychological variables also bear outstanding values in segmenting a market. The best examples of psychographic market segmentation are goods made exclusively for status seekers with a high price tag attached to them like brief-cases, pen, watches, cosmetics and so on.
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5.5 Marketing Mix

There are a number of aspects involved in marketing a product. Some of them are controllable and others are uncontrollable. The examples of controllable aspects may be the features of the product, its price, its selling through own salesmen or retailers, its advertisement through various means like television, newspapers and so on. In all these cases, there are a number of alternatives available to choose. The entrepreneur always tries to choose a mix of alternatives/decisions amongst the alternatives which may yield the maximum returns for him/her. There are usually four main decision areas, viz., product price, promotion and place which constitute a mix of decisions. The same mix is termed as marketing mix. McCarthy classified the four factors under 4 Ps, viz. Product, Price, Promotion and Place (Physical distribution). The term marketing mix was coined and introduced by Professor Neil H. Borden of the Harvard Business School. Both the term and concept have since been adopted throughout the world. Since then, several authorities have tried to define this new concept of marketing mix in different ways. Following are a few of them: According to Prof. Borden, the term marketing mix consists of the following: (i) A list of the important elements of ingredients that make up the marketing programmes, and (ii) A list of the forces that bear on the marketing operation of a firm and to which the marketing manager must adjust in his search for a mix or programme that can be successful. R. S. Davar, a well-known authority on marketing management opines, The policies adopted by manufacturers to attain success in the market constitute the marketing mix. Philip Kotler says, The firms task is to find the best settings for its marketing decision variable. The setting constitutes its marketing mix.
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Thus, the marketing mix is the tailoring the product, its price, its promotion and distribution to reach the target customers. In the present time, marketing mix has become an essential part of marketing management. 5.5 a) Product: The product consists of the policies and procedures relating to the product times to be offered and services to be rendered. It also includes research and development programmes and the new product policy. 5.5 b) Price: This element of marketing mix consists of the policies and procedures relating to the price level, price specifications and the price policy. 5.5 c) Promotions: This element includes special selling plans or devices directed at or through the trade, form of devices for consumer promotions and trade promotions. 5.5 d) Place (Physical Distribution): This element includes polices and procedures relating to the channels to be used between the plant and the consumer, the degree of selectivity among wholesalers and retailers and attempts to co-operation of trade. Marketing mix is bound to be different across the companies selling with different products. Marketing mix may also vary between the two companies willing the same product categories.
5.6 Branding and Packaging

In fact, product presentation to the potential consumers is also an important aspect of product marketing. Branding and packaging are two aspects relating to product presentation. 5.6 a) Branding The word branding has its origin to the word brand. A brand is a name, word, symbol or a mark used to identify a product and to differentiate it from the competitive products.
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According to American Marketing Association: A brand is a name, sign, symbol, or design, or a combination of them, intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competitors. Branding is a process of assigning a distinct name to the product so as to differentiate it from the competitive products of similar nature. If the brand is given a name, it is called brand name. Examples of brand names are Colgate tooth paste, Liril soap, Godrej refrigerator etc. In order to have a unique identity amongst the competing products, each brand is assigned a mark called brand mark. A brand mark is a symbol or mark used for the purpose for identification of the product. When the brand name is registered under the Trade and Merchantile Marks Act, 1958, it is called trade mark. A trade mark is the legalised version of a brand. Trade mark is shown by displaying the letter R enclosed in a circle. Advantages Branding offers distinct advantages to the buyers, the sellers and the society. Buyers: The buyers derive the following advantages from branding. 1. A brand generally denotes uniform quality of the product. 2. It makes purchasing easier and reduces the time and effort involved therein. 3. Purchasing branded products gives psychological satisfaction to the buyer. Seller: A seller also derives certain advantages from branding. 1. Branding helps in identifying the product. 2. It helps in product differentiation. 3. Branding helps in reducing selling costs by easing dependence on middlemen. Society: Branding benefits the society also: 1. Branding ensures quality of product. 2. It helps in better dissemination of product knowledge.
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Disadvantages There is, however, an opposite view as well. Branding has certain disadvantages to the buyers, sellers and society as a whole. These are as follows: Buyers: Branding bears the following disadvantages to the buyers 1. Branded products become more costly to the buyers as brand development involves costs. 2. Once the brand gains popularity, the manufacturer tends to reduce the quality of the product. Sellers: Branding has the following disadvantages to the sellers: 1. Developing and promoting a brand name involves money to be spent. 2. Branding increases the cost of production leading to increase in prices. 3. Seller finds it difficult to sell its product in the market amongst its rival products. Society: The disadvantages of branding for a society are as follows: 1. Branding often leads to higher costs and, in turn, higher prices. This is not considered as good from the society point of view. 2. The brands enjoying the loyalty of the customers prevent the new producers from plunging into the market. 5.6 b) Packaging: Packaging is considered as an important element of product mix. Some marketers even consider it as a fifth P along with product, price, promotion and physical distribution. Packaging has been variously defined. One of the most quoted definition is packaging is the art, science and technology of preparing goods for transport and sale. Thus, packaging has two salient aspects: (i) It helps in the physical distribution/transportation and sale of the products, (ii) It performs the functions of selecting package design and packaging material. In other words, packaging means the activities of designing and producing the container or wraper for a product. The container or wraper is called the package.
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Packaging has emerged as an industry. It consists primarily of two distinct segments: (i) firms which manufacture material for packages, viz., paper, polyster, plastic, tin, etc., and (ii) firms which convert the packaging materials into packages. In addition, there are some other firms engaged in printing labels to be used in the packages. Functions Packaging should perform the following five functions: 1. Protection: Packaging should protect the product from damage in the process of transit, storage and use. 2. Appeal: Packaging should attract and appeal to the customers. An attractive and appealing packaging serves as a silent salesman. 3. Performance: The package must perform the test for which it is primarily designed. If the package fails to do so, the product itself becomes useless. 4. Convenience: This is the fourth function of packaging. The package should be convenient to use, i.e., opening and closure of the package, the repetitive use value, disposability, etc. 5. Cost-effective: Finally, the package must be cost-effective also. While deciding on package cost, costs incurred in storage and handling of the empty packages and filled packages, transport cost for distributing filled packages along with their insurance cost for the transit period, losses due to breakage or spoilage of the product, etc., should e taken into consideration. Advantages Packaging offers the following advantages 1. It protects the product from damage in the process of transit, storage and use. 2. A good packaging serves as a silent salesman and, thus, promotes sales. 3. It reduces the costs of transportation and storage of the product. 4. Packaging helps in identifying the product and, thus, saves the customers from the use of duplicate and spurious products.
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Criticism Packaging is also subject to the following criticism: 1. The consumers often throw away the empty containers in public places which causes environmental problems. 2. The use of some plastic packaging causes health hazards. 3. Sometimes, packaging becomes deceptive when products of inferior quality are packed in attractive packages. Legal dimensions Like other industries, the government has laid down certain regulations in respect of packaging industry also. Principal among these is the product information given in the package known as levelling requirement. Level is a display of writtten, printed or graphic matter on the package/container of the product. Leveling needs to fulfill the following statutory requirements. (i) Net weight of the package when packed. (ii) Date of manufacture. (iii) Date of expiry. (iv) Maximum retail price including or excluding local taxes. (v) Directives of use. (vi) Directives for storage. A properly conceived level serves as an important sales instrument.
5.7 Pricing Policy

Once the production design is decided upon, the price of the product needs to be determined before selling it in the market. Therefore, what follows is meaning of price, its objectives, considerations, policies etc. 5.7 a) Meaning of Price: Price, goes by various names freight, fare, license fee, tuition fee, professional charge, rent, interest etc. But price in an
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enterprise/business system is seldom so simple. By definition, price is the money that customers must pay for a product or service. Pricing of the product is something different from its price. In simple words, pricing is the art of translating into quantitative terms the value of a product to customers at a point of time. Pricing is one of the key elements of marketing mix. The salient ingredients of pricing are : 1. Pricing covers all marketing aspects like the item goods or services mode of payment, methods of distribution, currency used etc. 2. Pricing may carry with it certain benefits to the customers like guarantee, free delivery, installation, free after-sale servicing and so on. 3. Pricing refers to definite prices of a product for different customers and different prices for the same customer at different times. 5.7 b) Factors Affecting Prices: The prices that a firm can charge for its products are subject to many influences. The various factors that may apply to all types of products are : 1. Product characteristics 2. Product Cost 3. Objectives of the firm 4. Competitive situations 5. Demand for the product 6. Customers behaviour 7. Government regulations One can classify the above factors into internal and external or controllable and uncontrollable factors. 5.7 c) Product Characteristics : By product characteristics, we mean numerous factors i.e. the product life cycle, the product perishability, the product substitution or the magnitude of the resistance.
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5.7 d) Product Cost: The second factor, the most important in determining price, is the cost of the product itself. While making marketing strategy, the decision makers should attempt to optimise the cost. The cost optimisation suits the customers buying power. In order to optimise the cost of the product, the incremental cost. 5.7 e) Objectives of the Firm : The objectives set by the firm also influence the prices of its products. For example, if the firm adopts skimming objectives, then the prices would generally be high. On the contrary, if the firm adopts the market penetration as its objective, the prices would normally be low. 5.7 f) Competitive Situation: The magnitude of competition in the market also affects prices. If the marketing manager finds that the magnitude of competition is high, prices would tend to be normally high. On the contrary, in the situation of low competition, the prices would be higher due to favourable market environment. If competition exists between the products of the same line with similar quality, the marketer should also watch the prices of alternative/substitute products also while determining the prices of the competitive product. 5.7 g) Demand for the Product: The fact remains that among the various
factors, the demand for the product concern is found exceptionally instrumental in guiding the pricing decisions. As per the law of demand, if there is more demand for the product, prices will be high and vice versa. Besides, seasonal nature of demand can also affect pricing policy by making it possible to alter prices with the high and low seasons of demand for the product. 5.7 h) Customers Behaviour: In market pricing decisions, the study of customers behaviour bears relevance. Of late, the behavioral scientists have gravitated increasing attention on the behavioural science. They feel that an indepth study of the customers behaviour would help diagnose the reactions of the customers regarding a product. While studying consumers, they should be traced out into specific groups in line with market segmentation.
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5.7
i) Government Regulations: While deciding pricing policy, the decision
maker does not need to underestimate the Government regulations imposed from time to time to control the business activity in the country. Therefore, due weightage should be assigned to such regulations like MRTP Act, Essential Commodities Act, Industries Development and Regulation Act and the Defence of India Rules. The basic purposes of these regulations are to optimise and regulate the distribution of consumer goods. For instance, creating artificial scarcity to raise prices of the products in the case of Government regulation would be a futile exercise.
5.8 Pricing Considerations

Unquestionably, the major objectives of pricing is the earning of maximum profits. This may be done by a pricing policy that will attempt to achieve a high return. Whatever pricing policy is decided on, for maximum effectiveness certain considerations must be taken into account before prices can be set. Following are the important considerations weighed in the pricing of the product. 1. Impact of price and output respectively on revenue and cost. 2. The level of output that can yield the maximum contribution towards overheads and profits. 3. Scope for price adjustment in accordance with changes in cost and demand conditions of the product. 4. Investigating into future implications, if any, of price change. 5. Recognition of rivals pricing strategies as well as quick reactions. 6. Element of elasticity of demand and revenue. 7. Effects of changes in prices of the product on the entry of the new enterprises.
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5.9 Pricing Policies/Methods

The common pricing methods and strategeis are discussed below : 5.9 a) Cost plus Method : The cost involved in the production of any product becomes the prime basis for determining its price. This cost plus method is the commonest method used for pricing by the small-scale enterprises. According to this method, firstly, the total costs, i.e. fixed costs and variable costs are worked out. Then, a certain margin for profit is added to total costs, because, the basic objective of running an enterprise is to earn profits. Now, what sum comes after is the selling price of the product. To put it in simple equation Total Cost (Fixed + variable) + Profit = Selling Price. 5.9 b) Skimming Pricing: Under skimming pricing strategy, a very high price is charged in the beginning with a view to recover the cost involved within a shorter period of time. This policy is feasible when the new product introduced is innovative and is used mainly by sophisticated group of customers. However, the high price is usually supported by of the product attracts other manufactures/ entrepreneurs also to plunge into manufacturing. As a result, the competition sets in and the prices fall. 5.9 c) Penetration Pricing: This is a way, contrary to the skimming pricing policy. Under this policy, price of the product is set at lower, to penetrate into the market. The underlying idea is to attract as many customers and this is a very particular form of pricing and when the product is on of mass consumption. 5.9 d) Market Rate Policy: This policy adopts the prevailing market rates for determining the price of the product. This method is used when the product is indistinguishable from those of the competitors. This method is also used in case of unbranded products like oils, courier, tailoring and repairing/servicing. 5.9 e) Variable Price Policy: Under this policy, the price of the same product varies from customers to customers depending upon the situation prevailing in the market. This method is adopted with an objective to maximise the profits. The
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following are some market situations when the entrepreneur adopts the variable price policy. 1. There is difference in the size of customers (e.g. a lower price may be offered to bulk customers). 2. There is a difference in the demand and supply between the locations. 3. There is difference in the bargaining powers of various customers. 4. There is difference in the customers ability to pay for the same product. 5. There is difference in the knowledge of customers about the market price of the product.
5.10 Resale Price Maintenance (RPM)

Under this policy, the manufacturers of the product fixes prices for the wholesalers and retailers. The retail prices of the product like drugs and detergents are printed on the inefficiency retailers not selling the goods timely. While its advantages are its freeness from competitions and no need for the customer to bargain, its main disadvantage is that it deprives of the customers from the advantages which may accrue to them through competition.
5.11 Distribution Channels or methods of Marketing

Production is for consumption. Having produced the products, these need to be made available to the final users, it becomes extremely difficult, if not impossible, to reach the customers on its own, the firm needs the help of marketing intermediaries, like wholesalers and retailers, to reach their products to the ultimate/final consumers. These intermediaries serve as channels to reach the product to the consumers. According to the Committee on definitions of American Marketing Association (1960) a channel of distribution or marketing channel is the structure of intracompany organisation units and extra-company agents and dealers, wholesale and retail, through which a commodity, product or service is market.
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R. S. Davar observes Distribution as an operation or a series of operations which physically bring goods manufactured or produced by any particular manufacturer into the hands of the final consumer or user. In fact, channels of distribution are like pipelines which take the right quantities of the right product to the right location where the target consumers want them at the right time. These distribution channels, in a way, refer to the methods of marketing also. In view of the number of intermediaries, distribution channels can be classified into three categories. These are : 1. Zero-Level Channel: When the distribution of the product is direct from the producer to the consumer or user, this is also called direct selling. 2. One-Level Channel: When the product is not sent direct from the producer to the consumer but the producer sells the product to the to retailer who, in turn, sells to the consumer, this channel is also known as distribution through retailers. 3. Two-Level Channel: When there are two levels of different kinds of intermediaries between the producer and the consumer. In other words under this channel, the manufacturer sells the product to the wholesaler who sells to the retailer and who finally sells to the consumer. This called as distribution through wholesalers and retailers.
5.12 How to select a Suitable Channel ?

The success or failure of an enterprise inter alia depends upon, to a great extent, the selection of a suitable channel of distribution. There are a number of factors that must be considered when a channel of distribution is to be selected. In practice, many choices are available, so, a careful study is required before a decision could be reached that will fit to the specific conditions of the enterprises to be the best channel of distribution. Some of the important factors to be kept in mind while selecting a distribution channel are : 1. Study the channels that are available, more especially those used by the competitors.
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2. Determine the channel that will best match the salient characteristics of the product to be marked. 3. Estimate the probable demand for the product. 4. Consider the available financial resources. 5. Approximate the costs, sales and profits for each available channel. 6. Determine the size of the product line and amount of a typical order.
5.13 Reserved items for exclusive purchase from Small-scale Enterprises

Small-scale industries suffer from marketing difficulties as their products are often unstandardised and of variable quality. Consequently, they suffer from a competitive disadvantage with lack counterparts. Because of the shortage of capital and financial resources, they also lack in staying capacity and are often forced to sell their products at unremunerative prices. Recognising the vital role of small-scale industries in Indias industrial and economic development, the Government has come forward to the rescue of small industries in a variety of aspects. The reservation of items for exclusive purchase from small-scale industries is also one such measure initiated by the Government to overcome the marketing problems of small-scale industries. Exercises: 1) Explain the concept of Marketing Mix. 2) How Brand is Advantageous to customers, society and the company ? 3) Explain the functions of Packaging.
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Unit 6
Structure
Legal Framework for Small Business
6.1 Legal Framework for Small Business 6.2 Management Process in Small Business
Learning Objectives
This unit covers the aspects of Labour and other legislations that are to be studied to start or run a small business/industry. The provisions of different enactments are mentioned briefly. Also, the principles of management for effective and efficient running of a small industry is stated herewith.
6.1 Legal Framework for Small Business

Central and State Governments have enacted several laws to regulate, protect and promote the growth of small-scale sector in India. Some of these laws are summarised in this unit. 6.1A The Factories Act, 1948 The main object of the Factories Act is to ensure healthy and safe working conditions for workers. The main provisions of this Act are as follows: 1. Definition of Factory: Under Sec. 2 (m) a factory is defined as any premises including its precincts wherein (a) a manufacturing process is carried on and (b) the specified number of workers (10 in case manufacturing is carried on with the aid of power and 20 if carried on without power) are employed. 2. Health of Workers: The Act contains the following provisions to safeguard the health of workers: (a) Cleanliness (b) Disposal of wastes and effluents (c) Ventilation and temperature (d) Prevention of dust and fume
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(e) Artificial humidification (f) Prevention of overcrowding (g) Lighting (h) Drinking water (i) Latrines and urinals and (j) Spittoons 3. Safety of Workers: In order to ensure safety, the Act provides for: (a) Fencing of machinery. (b) Work on or near moving machines-only trained males wearing tight fitting clothing. (c) Prohibition of employing young persons to work on dangerous machines. (d) Maintenance of striking gear or other devices for cutting off power. (e) Casing of power-driven machinery. (f) Prohibition of employing women and children near cotton openers. (g) Proper hoists and lifts etc. (h) Protection against dangerous fumes. (i) Appointment of safety officers. 4. Welfare of Worker: The Act provides following facilities to a worker: (a) Washing (b) Storing and drying clothing (c) Sitting (d) First aid appliances (e) Canteen (where 250 or more workers are employed) (f) Shelters, rest rooms and lunch rooms (g) Creches (where 30 or more women are employed) (h) Welfare officers (where 500 or more workers are employed) 5. Other Provisions: The Act also regulates hours of work, holidays and leave with wages etc.
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6. Obligations of the Employer: Under the Act, every employer or occupier of a factory is required to: (a) Obtain, wherever necessary, approval for the location and construction of the factory. (b) Procure license and registration in operating the factory. (c) Implement all the provisions of the Act and provide the prescribed facilities to workers. (d) Send in written notice to the Chief Inspector of Factories at least 15 days before occupying or using any premises as a factory. (e) Display notice, maintain registers and records prescribed under the Act and submit necessary returns to the Government. (f) Report fatal and other accidents and occupational diseases, if contracted by any workmen, to the prescribed authority. 6.1 B The Employees' Provident Fund and Miscellaneous Provisions Act, 1952 The main object of the Act is to provide security for old age to industrial workers in the form of provident fund and pension facilities. 1. Application: The Act is applicable to: (a) every establishment which is a factory engaged in any industry specified in schedule I, in which twenty or more persons are employed; and (b) any other establishment which the Central Government by notification in the Gazette, specify. All employees drawing a pay not exceeding Rs. 5000 per month are eligible to join Provident Fund Scheme under the Act. 2. Contribution: The Act provides that both the employee and the employer will contribute 8 to 10 per cent of basic wages and dearness allowance and retaining allowance (if any) to a provident fund.
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3. Obligations of the Employer: Under the Act, the employer is required to: (a) Maintain existing provident fund facilities pending the application of the scheme under the Act in the same manner and subject to the same conditions as it would have been, if this Act had not been passed. (b) Send to the Provident Fund Commissioner within 15 days of the commencement or application of the scheme, a consolidated return specifying the employees required or entitled to become members showing their basic pay, dearness allowance and other allowance (if any), and also submit a report within 15 days of the close of each month of the employees qualifying to become members for the first time during preceding months. (c) Receive declarations from the employees and send them to the commissioner. (d) Arrange to pay his contributions along with employee's contributions and also the administrative and inspection charges as required under this Act. (e) Send to the Provident Fund Commissioner within 15 days of the close of each month, a monthly consolidated statement showing the recoveries made from the wages of each employee and the amount contributed by the employer in respect of each employee. (f) Maintain such accounts in relation to the accounts contributed by him and his employees as directed by the Central Board, and assist the Board in making such payments from the Fund to his employees as are sanctioned from time to time. (g) Furnish to the Regional Provident Fund Commissioner particulars of owners, occupiers, directors, manages, partners or other persons having the ultimate control over the affairs of the establishment and intimate any change in these particulars by registered post within 15 days of the date of change.
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(h) Prepare and maintain contribution cards in respect of every employee who is a member or is entitled to become member of the Provident Fund. (i) Intimate to the Central Board of Trustees if an employee is dismissed for misconduct so that, if necessary, apart of the employer's contribution may be forfeited. (j) Maintain, an inspection note book for an inspector to record his observations on his visit to the establishment. (k) Maintain in the case of employees exempted from the Provident Fund Scheme on the ground of better benefits such accounts, submit such returns, provide such facilities for inspection, pay such inspection charges and invest Provident Fund collections in such manner as the Central Government may direct. (I) Transfer all accumulations in the existing Provident Fund standing to the credit of the employees including the interest thereon, and also all passbooks of accounts and other documents relating to the said accumulation to the Fund established under the Scheme on its application. (m) Transfer within the specified time, the accumulations to the credit of an employee of an exempted establishment who is a member of a Provident Fund if he leaves the employment and obtains re-employment in another establishment. Similar transfer is required for an exempted employee if the exemption is cancelled. 6.1C The Employees' State Insurance Act, 1948 The main object of this Act is to provide for certain benefits to employees and their dependents. These benefits are available in the event of sickness, maternity and employment injury. The benefits are given in the form of periodical payment and or medical treatment.
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1. Application: The Act covers all person employed for wages or in connection with the work of a factory or establishment irrespective of whether they are manual, supervisory or salaried provided their remuneration does not exceed Rs. 5,000 per month. The Act is not applicable to: (a) seasonal factories (b) factories or establishments under the control of the Government (c) factories working with the aid of power wherein less than ten persons are employed (d) factories working without the aid of power wherein less than 20 persons are employed (e) any member of the Indian naval, military or airforce (f) a worker whose wages exceed the prescribed limit (g) mines subject to the Mines Act, 1952 (h) railway running sheds. 2. Benefits available to Workers (a) Medical Benefit: An insured person and his dependents are provided medical treatment and attendance at the State Insurance Dispensaries (b) Sickness Benefit: An insured person is entitled to periodical payment in case of certified sickness. (c) Maternity Benefit: An insured employee woman is given periodical payments in the event of confinement. The benefit is available for a period of 12 weeks of which not more than 6 weeks shall precede the expected date of confinement. (d) Disablement Benefit: It consists of periodical cash payment in case of permanent or temporary disablement of an insured person due to employment injury. (e) Dependents' Benefit: Dependents of an insured person, who dies as a result of an employment injury are entitled to periodical payment in cash.
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(f)
Funeral Benefit: If an insured person dies, the eldest surviving member of his family shall be entitled to payment towards the expenditure on the funeral of the deceased insured person.
3. Contributions: Both the employer and the employees must pay their contributions at the prescribed rates. An employee whose average daily wages are below Rs.15 shall not be liable for the payment of contribution. Such an employee is, however, entitled to all the benefits under the Act. The act lays down conditions which employees must observe to receive the benefits. Penalties have also been laid down for failure to pay contribution and for other offences. 4. Obligations of Employer: The main obligations of an employer under this Act are as follows: (a) to get his factory or establishment registered within 15 days after the Act becomes applicable to him; (b) to arrange allotment of insurance number to all workers covered by the Act by completing and filling their declaration forms; (c) to assist his employee in obtaining their identity cards;
(d) to issue certificates of employment to workers until they get identity cards: (e) to pay to the Corporation the employees' and his own weekly contributions; (f) to report immediately the death of an insured person at the place of employment as a result of employment injury to the nearest local office and the nearest dispensary, hospital or clinic where medical benefit under the Act is available; (g) to maintain an accident book and enter therein each and every accident, and to investigate and report all accidents;
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(h) to arrange for the injured employee first aid and also transport for obtaining medical care; (i) to grant leave to the employees on the basis of the certificate issued by the ESI doctor; (j) not to reduce wages or discontinue or reduce any benefit which a worker is entitled to under the conditions of service; (k) not to dismiss, discharge or reduce or punish otherwise any employee during the period he is in receipt of sickness or temporary disablement benefit, or is under medical treatment or is unfit for work due to confinement; (I) to maintain such registers and records as may be required under the Act; (m) to submit to the Corporation such returns about the person employed which may enable the Corporation decide whether the factory or establishment is covered by the Act or not; 6.1D The Industrial Disputes Act, 1947 The main object of the Act is to make provision for the investigation and settlement of industrial disputes. The Act seeks: i) to provide a suitable machinery for the just, equitable and peaceful settlement of industrial disputes ii) to promote measures for securing and preserving amity and good relations between employers and employees iii) to prevent illegal strikes and lockouts iv) to provide relief to workers against layoffs, retrenchment, wrongful dismissal and victimisation v) to promote collective bargaining vi) to improve the condition of workers
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1. Authorities: The Act provides for the setting up of the following for effective investigation and settlement of industrial disputes: (a) Works committees (b) Conciliation officers (c) Boards of conciliation (d) Courts of inquiry (e) Labour courts (f) Industrial Tribunals (g) National Tribunal Arbitration, conciliation and adjudication machinery is provided for settlement and prevention of industrial disputes. The Act makes it obligatory for an employer to set up a 'Grievance Settlement Authority' in an industrial establishment in which fifty or more workers have been employed in the preceding twelve months. This authority shall have the responsibility to settle industrial disputes concerning an individual worker. 2. Obligation of Employer: Under the Act, an employer is required (a) To constitute works committees and provide all facilities for their proper working; (b) To implement all agreements, settlements and awards, and produce all documents and render other assistance for conciliation and adjudication of disputes; (c) To desist from declaring any illegal lockout;
(d) Not to layoff or retrench workmen or close undertakings without prior permission of the Government; (e) To pay compensation for layoff and retrenchment and closure, and to re-employ retrenched workmen; (f) To avoid any change in service and employment conditions without notice;
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(g) To report to the Government or its specified authority any strike or any notice of strike/lockout received/given within five days of receiving/giving the notice; (h) To maintain status quo tendency of disputes in conciliation and arbitration, and avoid taking disciplinary action against the workmen connected with disputes and 'protected workmen' as required under the Act; and (i) To avoid unfair labour practices.
6.1 E The Payment of Wages Act, 1936 The main object of the Act is to secure to workers payment of wages at regular intervals, in legal tender and without unauthorised deductions. The Act covers persons employed in a factory or industrial or other establishment or in a railway whether directly or indirectly through a sub-contractor. The Act does not apply to workers drawing wages in excess of Rs. 1,600 per month. 1. Fixation of Wage Period: The person responsible for payment of wages shall fix the wage periods, which shall not exceed one month. 2. Time of Payment: In factories or establishments employing less than 1000 persons, wages must be paid before the expiry of the seventh day after the last date of the wage period. In all other cases wages must be paid before the expiry of the tenth day after the last day of the wage period. The wages of a worker whose services have been terminated shall be paid on the next day after such termination. All payment of wages shall be made on a working day. 3. Medium of Payment: All wages shall be paid in current coin or currency notes or both. The employer may after obtaining written authorisation of workers pay wages either by check or by crediting the wages in their bank accounts.
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4. Authorised Deductions: The Act allows only the following deductions from the wages of an employee: (a) Fines (b) Absence from duty (c) Damage/loss of goods or of money entrusted to the employee (d) Housing accommodation and amenities provided by the employer (e) Recovery of advances or adjustment of over-payment (f) Recovery of loans (g) Contribution to and repayment of advances from any provident fund (h) Income-tax (i) Payment to cooperative society or scheme of insurance in a post office (j) Deduction made with written authorisation of the employee for payment of premium, on his life insurance policy or purchase of securities. The total amount of deductions shall not exceed 75% of the wages where deductions are made for payment to cooperative societies and 50% of the wages in other cases. 5. Rules for Fines (a) Fines can be imposed for approved list of acts and omission. (b) The list must be exhibited at or near the main entrance of the factory or at the prescribed places in the case of railway. (c) Before imposing fine, the employee shall be given an opportunity of showing cause. (d) The total amount of fine shall not exceed three percent of the rupee wages payable to the employee in respect of that wage period. (e) No fine shall be imposed on a person below the age of 15 years. (f) All fines and amounts realised on account of such fines shall be recorded in a register.
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6. Obligations of the Employer: The Act requires every employer to: (a) see that workers are paid wages regularly and in time; (b) fix wages periods which shall not exceed one month; (c) pay wages in the prescribed form; (d) make only authorised deductions; (e) impose fines only as per the rules; (f) maintain the prescribed registers; (g) display notice as prescribed. 6.1 F The Minimum Wages Act, 1948 The main object of the Act is to prevent exploitation of workers by providing for fixation of minimum wages rates in certain employment mentioned in the schedule attached to the Act. 1. Obligations of the Employer: (a) to pay the wages fixed by the Government without any unauthorised deductions; (b) to observe all directions which may be issued under the Act in regard to normal working hours, weekly day of rest with wages and overtime rates; (c) to maintain registers and records as required by the Government showing particulars of employees, work performed by them, wages paid to them and receipt given by them. (d) to issue wage books or slips to employees in respect of minimum rates of wages if required by the Government, and to make authenticated entries in such wage books or wage slips. 6.1 G The Payment of Bonus Act, 1965 This Act imposes a statutory obligation on the employer to pay bonus to his workers. It also lays down the formula for the calculation of minimum and maximum bonus. The Act applies: (a) to every factory as defined under the Factories Act,
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(b) to every other establishment in which twenty or more persons are employed on any day during an accounting year. The Government may, after giving a two months notification in official gazette, make the Act applicable to any factory or establishment employing less than twenty but not less than ten persons. An employee drawing a wage or salary of more than Rs. 3,500 per month is not eligible for payment of bonus. An employee who has worked for not less than thirty working days in an accounting year shall be entitled to payment of bonus. An employee shall be disqualified from receiving bonus if he is dismissed from service for fraud or violent behaviors while on the premises of the establishment, or theft, misappropriation or sabotage of any property of the establishment. The amount of bonus depends on the allocable surplus as prescribed in the Act. Obligations of Employer: Under the Act, an employer is under obligations (a) to work out and pay annual bonus to his employees as per the provisions of the Act; (b) to maintain such registers and records as prescribed in the Act; (c) to furnish information to the inspector and allow him to enter the premises as and when required; (d) to permit the inspector to examine any person or document for ensuring the proper implementation of the Act and the rules made under it. 6.1 H The Workmen's Compensation Act, 1923 The main object of the Act is to secure the payment of compensation by an employer for injuries sustained by an employee in an accident, which has occurred in the course of or out of employment. An employer is liable to pay compensation when: (a) a personal injury has been caused to the workman; (b) the injury has been caused by an accident;
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(c)
the accident has arisen out of and in the course of employment;
(d) the injury has resulted either in the death of the workman or in total or partial disablement for more than three days. The employer is also liable to pay compensation for occupational diseases contracted by a workman. A list of such diseases is given in Schedule III of the Act. Compensation is payable for both death and disablement. Disablement may be permanent (total or partial) or temporary (total or partial). Schedule I to the Act contains a list of injuries deemed to result in permanent partial disablement along with percentage of loss of earning capacity which is deemed to result in each case. The employer is not liable to pay compensation in the following cases: (a) If the injury does not result in the total or partial disablement of the workman for a period exceeding three days. (b) If the injury, not resulting in death, is caused by an accident which is directly attributable to (a) the workman having been at the time of the accident under the influence of drink or drugs; or (b) the willful obedience of the workman to an order expressly given, or to a rule expressly framed, for the purpose of securing the safety of workman; or (c) the willful removal or disregard by the workman of any safety device provided for his safety. (d) If the injured workman has instituted a civil suit for damages in respect of the injury against the employer. (e) If the accident causing death or injury did not arise out of and the course of employment.
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Obligations of Employer The Act provides for the following obligations on the part of employers: (1) to pay compensation for personal injury caused to a workman by accident arising out of and the course of employment (Sec. 3); (2) not to deduct from the compensation payable any amount paid to the workman for his medical treatment (Sec. 4); (3) to pay compensation as soon as it falls due (Sec. 4A); (4) to deposit compensation with the Commissioner in respect of a workman whose injury has resulted in death and also to deposit lumpsum compensation payable to a workman or a person under a legal disability (Sec. 8); (5) to maintain a notice book at the premises where the workmen are employed, in the prescribed form, which should be readily accessible at all reasonable times to any injured person or any other person acting on his behalf for recording the accident [Sec.10 (3)]; (6) to file, within thirty days of the service of a notice by the Commissioner, a statement indicating the circumstances attending the death of a workman and whether he is or is not liable to deposit compensation on account of death of the workman (Sec.10A); (7) to notify the Commissioner or any other prescribed authority of any accident occurring on his premises which results in death or serious bodily injury within seven days of the occurrence (Sec. 10B); (8) to pay compensation to a workman employed through a contractor for the execution of any work which is part of his trade or business (Sec. 12); (9) to submit an annual return to the Government specifying the number of injuries in respect of which compensation has been paid by the employer during the previous year and the amount of such compensation together with such other particulars as may be prescribed (Sec. 16);
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(10) to produce documents and material objects before the Commissioner as and when required (Sec. 23); (11) to arrange to get registered with the Commissioner any agreement made with the workman or his dependants settling the amount of lumpsum payable as compensation, or by way of redemption of half-monthly payments on account of temporary disablement, with the Commissioner (Sec. 28). 6.1 I The Payment of Gratuity Act, 1972 The main object of the Act is to provide for payment of gratuity to an employee at the time of his/her retirement. The payment is made in recognition of the long and meritorious services rendered by the employee. The Act is applicable to; i. every factory, mine, oilfield, plantation, port and railway company; ii. every ship or establishment in which ten or more person are/were employed on any day of the preceding twelve months. An employee becomes eligible for gratuity provided he/she has rendered continuous service for one year or more. The gratuity is payable at the rate of fifteen days' wages as last drawn for every completed year of service or part thereof in excess of six months. Obligation of the Employer: Under the Act, an employer is required (a) to pay gratuity to the employees as per the provisions of the Act; (b) to determine the gratuity as soon as it becomes payable and give notice of the same to the worker concerned and the controlling authority; (c) in case of dispute, deposit the amount of gratuity with the controlling authority; (d) in case of controlling authority decides that any more gratuity is due to an employee, to deposit the same;
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(e) to obtain an insurance for his liability for payment towards the gratuity unless he has established an approved gratuity fund; (f) to display an abstract of the Act and the Rules made thereunder in English and in the language understood by majority of the employees at a conspicuous place at or near the main entrance of the establishment.
6.1 J The Trade Unions Act, 1926 A trade union is primarily an association of employees. The Act seeks to protect trade unions from civil or criminal prosecution so that the unions could carry on their legitimate activities for the benefit of the working class. The Act is applicable to unions of workers as well as to associations of employers. The Act lays down : i. conditions or regulations for registration of trade unions; ii. the rights and liabilities of registered trade unions; iii. the objects for which general funds of registered trade unions may be spent; iv. constitution of a separate fund for political purpose. In the event of a trade dispute, the employer is required to negotiate with the registered trade union for the purpose of setting the dispute. The small-scale entrepreneur should, therefore, be conversant with the rights and obligations of registered trade unions. 6.1 K The Indian Boilers Act, 1923 The Act lays down regulations for the use of a boiler in a manufacturing process. The main provisions are as follows: i. the employer must get a permit for the use of boiler, by applying to the inspector and getting the boiler registered; ii. the transfer of boiler from one state to another must be reported to the prescribed authority;
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iii. the boiler must not be operated at more than the maximum pressure recorded in the permit; iv. the boiler must be put incharge of a person holding a certificate of competency.
6.1 L The Employment of Children Act, 1938 The main object of the Act is to regulate and protect child labour. The main provisions of the Act are: i. A child below 14 years is not be employed in bidi-making, carpet weaving, cement manufacturing, cloth printing, dyeing and weaving, match
manufacturing, explosives and fire-works, mica-cutting, soap manufacture, tanning, wool cleaning, etc. ii. A child below 15 years is not to be employed in any occupation, which is connected with transport of passengers, goods or mails by railway; or connected with a port authority. iii. For children who have completed 15 years but not 17 years, the working hours should be so fixed that a rest of 2 hours is allowed between 10 p.m. and 7 p.m. 6.1 M The Apprentices Act, 1961 The employer of an establishment to which the Act applies is under obligations; i. to provide the apprentice training in his trade in accordance with the prescribed provisions; ii. to appoint a qualified person to give training to the apprentice; iii. to pay to every apprentice during the training a stipend at not less than the prescribed rate; iv. to pay compensation to the apprentice for personal injury in accordance with the provisions of the Workmen's Compensation Act; v. to maintain records of the progress of training of each apprentice.
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6.1 N The Industrial Employment (Standing Orders) Act, 1946 The main object of the Act is to require employers to define the terms and conditions of employment and to make them known to the workers. The Act is applicable to every industrial establishment employing 100 or more workmen. The matters to be provided in the standing orders are specified in the schedules attached to the Act. Once the standing orders are certified by the appropriate authority these become statutory terms of employment between the employer and the employees. The employer must submit the draft standing orders to the certifying officer within six months of the date of application of this Act to the establishment. The following matters are required to be specified in the standing orders: i. Classification of workmen (permanent, temporary, probationer etc.). ii. Manner of intimating to workmen periods and hours of work, holidays pay days and wage rate. iii. Shift working. iv. Attendance and late coming. v. Procedure to be followed while applying for leave and holidays, and the authority to whom application is to be made. vi. Requirement to enter premises by certain gates and liability to search. vii. Closing and reopening of sections of the industrial establishment, temporary stoppages of work and rights of employer and workmen arising thereform. viii. Suspension or dismissal for misconduct and acts which constitute omission. ix. Termination of employment and the notice thereof to be given by the employer and workmen.
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6.1 O The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959 This Act requires employers in private and public sector establishments to notify to the employment exchanges all vacancies except the following; i. Unskilled office work; ii. vacancies for less than three months; iii. vacancies to be filled through promotion; iv. vacancies in an employment carrying a remuneration of less than sixty rupees a month. The employers are also required to file returns relating to staff strength at regular intervals. 6.1 P The Maternity Benefit Act, 1961 The object of the Act is to regulate the employment of women in certain establishments for certain periods before and after child-birth and to provide for maternity benefit and certain other benefits to them. The Act is applicable to shops, establishments, factories, mines, plantations employing ten or more persons except to those to which the provisions of the Employees' State Insurance Act, 1948 apply for the time being.
6.2 Management Process in Small Business

Small business has its own distinctive features. The owner himself often acts as the chief executive and looksafter more than one functional area. Therefore, managerial strategies and practices used successfully in large firms cannot be blindly applied to small-scale units. Basic managerial functions in the two types of business -large and small are the same. But the manner in which these functions should be carried out can be different.
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6.2 A Planning Process Planning is the process of deciding the objectives of business and choosing the most appropriate course of action to achieve the objective. Planning is a rational process because logical reasoning is used in setting objectives and in choosing course of action. Planning involves thinking and judgement and is, therefore, called an intellectual process. Planning is a continuous process, as changes in plans have to be made from time to time to take care of changing environment. Planning is forward looking because plans are prepared for a future period of time. Planning is a basic function as it lays the foundation for other management functions. Quite often a haphazard approach is adapted to planning in small firms. There is a misconception that small firms are simple and do not require planning. The small-scale entrepreneur does not want to involve his staff in the planning process due to the desire to keep the secrets with himself. Personal responsibility for results, lack of planning skills and absence of specialised staff are other major hurdles to planning in small firms. Generally small-scale units tend to take a short-range view of problems and seldom develop long range strategic plans. Planning is very important for small business. It helps to focus attention on objectives, provides direction to decision making, assists in facing uncertainty and changes, improves efficiency to operations and facilitates coordination and control. Barriers and Guidelines to Planning in Small Business Barriers: (a) Misconception that only big firms need planning (b) Undue concern for secrecy (c) Short term orientation
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(d) Preoccupation with daily business routine (e) Lack of planning skills (f) Absence of specialised staff advice and assistance (g) Lack of adequate and accurate data
Guidelines: (a) Realise the need for planning and the barriers (b) Develop a deep commitment to planning (c) Begin with a simple framework
(d) Design a tailor made planning system rather than implanting the planning system of some other firm (e) Make planning a regular exercise (f) Carry out a thorough analysis of internal and external environment
(g) Judge the existing organisation structure and decision making system before introducing formal planning Systematic planning in any business consists of the following steps: A. Mission Statement: First of all the basic mission or overall philosophy of the enterprise is clearly defined. Mission statement should reflect the interests of the owners, customers, employees and the society as a whole. B. Analysis of External Environment: Such analysis should cover economic conditions, government policies and regulation, technological changes, political conditions and social situation. It will reveal opportunities and threats, which the firm is likely to face. Special attention needs to be paid to Market conditions and competitive situation. C. Analysis of Internal Environment: Situation audit is undertaken to judge the current position of the firm in terms of market share, capacity utilisation, sales turnover, profit margin, etc. Appraisal of the firm's resources (resource
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analysis) should be carried out to identify its strengths and weaknesses. Physical facilities financial position, managerial capabilities, marketing competence, etc. are covered in resource analysis. Financial and nonfinancial ratios are often used to judge the resource position. D. Formulation of Objectives: On the basis of information collected through SWOT analysis, the goals, which the firm wants to achieve in future, are decided. Goals should be challenging but attainable. Goals should also reflect the mission of the firm. Goals are laid down both for short period (next year) as well as long term (e.g. next five years). E. Development of Action plans: Action plans refer to the future course of action to be adopted to attain the objective. Action plans include the following: (a) Priorities of different goals. (b) Alternatives selected to exploit opportunities and to face threats in the environment. (c) Timing of different courses of action.
(d) Action programs for different functional areas of business. Plans should be formalised in the form of working documents. Such formalisation is necessary for effective communication and implementation of plans. F. Execution and Review of Plans: Plans and action programs are implemented. The plans are reviewed on a continuous basis. Whenever necessary revision in the adopted plans and programs should be carried out. Such updating is essential to take care of changes in the environment and capabilities of the enterprise. 6.2B Organising Process According to Peter F. Drucker the process of organising consists of three steps activities analysis, decisions analysis and relations analysis.
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1. Activities Analysis: It involves the following steps: (a) Determination of major functions involved in achieving objectives of the firm. (b) Various sub-functions involved in each major function. (c) Volume of work involved in each major function and its sub-functions. (d) The positions repaired to perform the activities. 2. Decisions Analysis: It consists of the following: (a) Deciding the basis of departmentalisation so that task could be grouped into specialised units. Generally, functional departmentation is
appropriate for small-scale units, products, territories, customers are other major base of departmentaIisation. (b) Choosing the type of organisation structure so that departments are integrated into a formal structure. 3. Relations Analysis: Specific positions and activities are inter-linked through the chain of command and horizontal relationship. The authority,
responsibilities and accountability of every position and its relationship with other positions are clearly defined. Various positions are filled with persons having the necessary education, training, experience and other qualifications. Types of Organisation Structure There are four main types of formal organisation which are as follows: 1. Line Organisation: In this form of Organisation, a straight line of command exists from the highest to the lowest position. The authority and responsibility of every position is clearly defined. Each subordinate is accountable to only one superior. But there is no specialisation. Line organisation is considered to be the most suitable for small-scale units. 2. Line and Staff Organisation: As an enterprise grows, management requires the services of staff experts. The experts advise line managers but the final authority for taking decisions and issues orders remains with true executives.
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Line and staff organisation provides the benefits of specialisation and unity of command. But there is danger of conflicts between line officers and staff experts. 3. Project Organisation: In this type of organisation, a separate team is created for every major project. The team provides expert and focussed efforts for timely completion of the project. 4. Matrix Organisation: This structure is combination of functional and project responsibilities. In addition to the permanent functional departments, project teams are created temporarily. The staff for projects is largely deputed from functional departments. On the completion of a project the staff returns back to their respective departments. Small-scale firms may adopt project structure when several projects are carried out simultaneously and each project requires high degree of coordination among several technical experts.
Principles of Sound Organisation: 1. Division of Work: The work to be performed should be divided into meaningful tasks and one employee should as far as possible concentrate on one type of work only. 2. Unity of Command: Each employee should report and be accountable to only one superior. Orders and instructions should come from a single boss. 3. Parity between Authority and Responsibility: The authority of every employee should be commensurate with his responsibility. The authority and responsibility of every position should be clearly specified in the form of job descriptions and organisation charts. 4. Scalar Chain: The chain of command from the top position to the lowest position must be direct and clear. 5. Departmentalisation: Similar tasks should be grouped into the same department on an appropriate basis.
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6. Balance Between Centralisation and Decentralisation: Proper delegation of authority should be made to ensure that there is the right degree of decentralisation. 7. Appropriate Span: Span of control means of number of subordinates reporting directly to one superior. The span should be appropriate in view of the nature of work, ability of the superior, competence of subordinates, degree of coordination required, etc. Generally, small enterprises prefer a wide span as they cannot afford the cost of additional layers in the organisation. 8. Human Use of Human Resources: The requirements of work should be integrated with the capabilities and aspirations of employees. 9. Flexibility: The organisation structure should be able to adapt to changes in the internal and external environment.
6.2 C Leadership and Motivation The quality and style of leadership determine largely the success of business. In small firms generally the owner provides leadership. Leadership is the process of influencing people towards the accomplishment of organisational objectives. It involves motivating and guiding people. The leader creates teamwork, improves morale and maintains discipline. The leader may adopt a hard or soft style to influence the employees. The style depends upon leader's assumptions about human nature. Douglas McGregor has formulated two extreme theories concerning human nature. Theory X: Its assumptions are: i. An average human being has inherent dislike for work and will avoid it. ii. An average person prefers to be directed and wants to avoid responsibility. iii. An average human being has little ambition and wants security above all.
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iv. Therefore, people need to be coached, controlled, directed and threatened with punishment to wax them to work towards objectives of the organisation. Managers who follow Theory X tend to be autocratic. They do not delegate authority, exercise close supervision and use pressure tactics to get things done. Theory Y: Its assumptions are: i. Expenditure of physical and mental energy is natural like rest or play. ii. An average individual learns under proper conditions not only to accept but also to seek responsibility. iii. People will exercise self-direction and self-control in the service of objectives to which they are committed. External control and threat of punishment are not the only means of motivating people. iv. Commitment to objectives is the result of rewards associated with their achievement. v. The capacity to exercise relatively high degree of imagination, ingenuity and creativity in solving organisational problems is widely, not narrowly, distributed in the population. vi. Under conditions of modern industrial life, the intellectual potentials of people are partially utilised. Managers who believe in Theory Y assumptions adopt participative leadership. They involve employees in the process of decision making. Qualities of a good Leader 1. Physical Qualities: Sound health, stamina, enthusiasm and nervous energy, force fullness. 2. Intellectual Qualities: Intelligence, sound judgement, decisiveness, maturity, vision.
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3. Moral Qualities: Integrity, moral image, fair play, will power, sense of purpose and responsibility, achievement drive, objectivity. 4. Social Qualities: Ability to inspire, tactfulness, persuasiveness, selfconfidence, empathy, initiative, knowledge of human nature, communication skills.
6.2 D Communication Communication is the interpersonal and ongoing process of exchanging information and views between two or more persons with the objective of creating mutual understanding among them. Various elements of communication process are given below: (a) Sender: Sender may be a speaker, a writer or an actor. (b) Messages: Message may be verbal, written or gestures or a combination of all. It may be encoded in symbols or words, etc. (c) Channels: The message may be sending through face to face talk, telephone, mail, etc. (d) Receiver: The receiver may be a listener, a reader or a viewer. (e) Decoding: The receiver converts symbols, etc. in the original message to understand it. (f) Feedback: It is the reverse flow of message indicating that the receiver has understood/misunderstood the message. Effective communication is essential for the success of small as well as large business. It enables the employees to understand what the employer wants and to participate in business affairs. Sound Communication system also enables the employer to understand the needs, attitudes and aspirations of employees. In small firms, communication takes place mostly through face to face talks due to direct contact between employers and employees.
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Barriers and Gateways to Effective Communication Barriers 1. Semantic barrier words having different meanings for sender and receiver 2. Jargon Use of unfamiliar words 3. Over load transmitting too much information that confuses the receiver 4. Psychological barriers (a) passing only positive information (filtration) (b) hearing what one wants to hear (selective perception) (c) lack of trust between sender and receiver (Credibility gap) 5. Physical barriers noise 5. Encourage employees to express there ideas and opinions 6. Lack of feedback 6. Encourage two way communication 7. Appreciate and recognise good work 8. Explain reasons behind decisions and actions 9. Create mutual trust and confidence 6.2 E Controlling Controlling is the process of setting standards of performance, comparing actual performance with the standards and taking actions to bridge the gap between the standards and the actual. Managers use several techniques for monitoring
Gateways 1. Use clear and specific words
2. Be brief but complete 3. Listen carefully
4. Keep employees informed
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performance and regulating operations. Supervision, reports, breakeven analysis, budgets, management audit, financial ratios, PERT and CPM are examples of these techniques. A good control system should be goal oriented, forward looking, quick, flexible, objective, economical and simple. It should focus attention on exceptional or critical deviations between standards and actual results. 6.2 F Management of Time Time is a very valuable resource especially for a small-scale entrepreneur who is often burdened with multiple roles in his business. The entrepreneur can achieve considerable improvements in his firm's performance through more efficient use of time. Management of time involves the following steps: (a) Time Use Analysis: First of all systematic analysis is made to find out the proportion of total time spent by the employer and his staff on different activities. (b) Setting Priorities: Critical or vital activities should receive greater time. Activities taking more than the justified time need to be identified. Irrelevant or time wasting activities should be eliminated. (c) Time Allocation: A work-cum-time schedule should be prepared. Proper time should be allocated to each activity. The tasks one wants to do but for which he does not have time should be noted. (d) Adhere to Time Schedule: The most difficult part of time management is to complete each activity within the prescribed time period. For this purpose, it is necessary to delegate tasks to subordinates, to organise every workday and to continuously evaluate the time management system.
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Time Wasters and Savers Time Wasters 1. Unclear goals 2. Lack of priorities 3. Indecisiveness 4. Lack of concentration 5. Failure to delegate 6. Paper work 7. Poor filing system 8. Visitors 9. Telephone calls 10. Meetings Time Savers 1. Clear and specific goals 2. Carefully set priorities 3. Sense of urgency 4. Clear communication 5. Effective delegation 6. Learning to say 'No' 7. Doing things right first time 8. Daily review of results 9. Getting started fast 10. Avoid activity trap 11. Separate unimportant from important
Exercises: 1) Explain the duties of an employer with regard to (a) Factories Act (b) E.S.I. Act (c) Payment of Bonus Act
2) Explain theory X and Y of Management.
3) How the communication be effective ? Explain with examples.
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References: Small Industries Management by Khanka Management of Small Business by Vasant Desai Industrial Management by Fraunk Principles of Management by T. N. Chabra
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